3. In one year, Bold Betties Inc. will pay a $3 per share dividend and it is expected to grow by 3 percent per year. If the required return on this stock is 12 percent, what is the current Dox(1+g) D₁ stock price? Hint: Po = = R-g R-g

Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
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**Transcription:**

3. In one year, Bold Betties Inc. will pay a $3 per share dividend and it is expected to grow by 3 percent per year. If the required return on this stock is 12 percent, what is the current stock price? Hint: \( P_0 = \frac{D_0 \times (1+g)}{R-g} = \frac{D_1}{R-g} \)

4. In one year, Bold Betties Inc. will pay a $6 per share dividend and it is expected to grow by 4 percent per year. If the required return on this stock is 10 percent, what is the current stock price? Hint: \( P_0 = \frac{D_0 \times (1+g)}{R-g} = \frac{D_1}{R-g} \)

**Explanation:**

Both sections present financial scenarios involving stock valuation using the Dividend Discount Model (DDM), specifically the Gordon Growth Model:

- **\( P_0 \)**: Current stock price
- **\( D_0 \)**: Current dividend per share
- **\( D_1 \)**: Dividend expected in a year, calculated as \( D_0 \times (1+g) \)
- **\( g \)**: Growth rate of the dividend
- **\( R \)**: Required return or discount rate

In these formulas, \( D_1 \) is the dividend expected in the next period, which is used to determine the present value of the stock. The formula helps calculate the fair value of a stock based on its expected future dividends, accounting for a constant growth rate and desired rate of return.
Transcribed Image Text:**Transcription:** 3. In one year, Bold Betties Inc. will pay a $3 per share dividend and it is expected to grow by 3 percent per year. If the required return on this stock is 12 percent, what is the current stock price? Hint: \( P_0 = \frac{D_0 \times (1+g)}{R-g} = \frac{D_1}{R-g} \) 4. In one year, Bold Betties Inc. will pay a $6 per share dividend and it is expected to grow by 4 percent per year. If the required return on this stock is 10 percent, what is the current stock price? Hint: \( P_0 = \frac{D_0 \times (1+g)}{R-g} = \frac{D_1}{R-g} \) **Explanation:** Both sections present financial scenarios involving stock valuation using the Dividend Discount Model (DDM), specifically the Gordon Growth Model: - **\( P_0 \)**: Current stock price - **\( D_0 \)**: Current dividend per share - **\( D_1 \)**: Dividend expected in a year, calculated as \( D_0 \times (1+g) \) - **\( g \)**: Growth rate of the dividend - **\( R \)**: Required return or discount rate In these formulas, \( D_1 \) is the dividend expected in the next period, which is used to determine the present value of the stock. The formula helps calculate the fair value of a stock based on its expected future dividends, accounting for a constant growth rate and desired rate of return.
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