Currently the market portfolio is providing a 5% return. A particular stock you're interested in is providing dividends of $13/year. a. If the dividends for this stock don't ever grow, what would you pay for the stock? b. Now imagine that we were to observe that historically the stock's dividends have grown at a fairly constant rate of 3% per year. If the current annual dividend is $13.00/share, what do you expect next year's dividend to be? c. Given this new information about the stock's historic growth rate, what would you now be willing to pay for the stock?

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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2. Currently the market portfolio is providing a 5% return. A particular stock you're interested in
is providing dividends of $13/year.
a. If the dividends for this stock don't ever grow, what would you pay for the stock?
b. Now imagine that we were to observe that historically the stock's dividends have grown at a
fairly constant rate of 3% per year. If the current annual dividend is $13.00/share, what do
you expect next year's dividend to be?
c. Given this new information about the stock's historic growth rate, what would you now be
willing to pay for the stock?
Transcribed Image Text:2. Currently the market portfolio is providing a 5% return. A particular stock you're interested in is providing dividends of $13/year. a. If the dividends for this stock don't ever grow, what would you pay for the stock? b. Now imagine that we were to observe that historically the stock's dividends have grown at a fairly constant rate of 3% per year. If the current annual dividend is $13.00/share, what do you expect next year's dividend to be? c. Given this new information about the stock's historic growth rate, what would you now be willing to pay for the stock?
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