Question 3 (Non-constant Growth and Negative Growth Dividend Discount Model) Part (a) South Side Corporation is expected to pay the following dividends over the next four years: $8, $6, $3, and $2. Afterwards, the company pledges to maintain a constant 4 percent growth rate in dividends, forever. If the required return on the stock is 13 percent, what is the current share price? Part (b) Antiques R is a mature manufacturing firm. The company just paid a $10 dividend, but management expects to reduce the payout by 8 percent per year, indefinitely. If you require an 11 percent return on this stock, what will you pay for a share today?
Risk and return
Before understanding the concept of Risk and Return in Financial Management, understanding the two-concept Risk and return individually is necessary.
Capital Asset Pricing Model
Capital asset pricing model, also known as CAPM, shows the relationship between the expected return of the investment and the market at risk. This concept is basically used particularly in the case of stocks or shares. It is also used across finance for pricing assets that have higher risk identity and for evaluating the expected returns for the assets given the risk of those assets and also the cost of capital.
Question 3 (Non-constant Growth and Negative Growth
Part (a)
South Side Corporation is expected to pay the following dividends over the next four
years: $8, $6, $3, and $2. Afterwards, the company pledges to maintain a constant 4
percent growth rate in dividends, forever.
If the required return on the stock is 13 percent, what is the current share price?
Part (b)
Antiques R is a mature manufacturing firm. The company just paid a $10 dividend,
but management expects to reduce the payout by 8 percent per year, indefinitely. If
you require an 11 percent return on this stock, what will you pay for a share today?
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