After One Year, a Company Will Pay $5 in Dividends

question 76

Essay

After one year, a company will pay $5 in dividends. It commits to paying $5.30 two years from the current date. This growth rate for dividends is expected to continue indefinitely. The U.S. Treasury bond yield is 8% and the equity-risk premium is equal to 2.5%. Compute the required stock return and current price of this stock, using the dividend-discount model.

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Definitions:

Yield To Maturity

The total return anticipated on a bond if held until its maturity date.

Intrinsic Value

The actual value of a company, stock, currency, or product determined through fundamental analysis without reference to its market value.

Annual

Pertaining to something that happens every year or is calculated over a year's time.

Coupon Rate

An annual interest percentage paid by a bond, based on its face value.