1. A firm pays a $2.50 dividend at the end of year one (D1), has a stock price of $159 (P0), and a constant growth rate (g) of 10 percent.
a. Compute the required rate of return (Ke). (Do not round intermediate calculations. Input your answer as a percent rounded to 2 decimal places.)
Rate of return: %
Indicate whether each of the following changes will increase or decrease the required rate of return (Ke). (Each question is separate from the others. That is, assume only one variable changes at a time.) No actual numbers are necessary.
b. If the dividend payment increases:
Dividend yield:
Required rate of return:
c. If the expected growth rate increases:
Required rate of return:
d. If the stock price increases:
Dividend yield:
Required rate of return:
2. Maxwell Communications paid a dividend of $.80 last year. Over the next 12 months, the dividend is expected to grow at 10 percent, which is the constant growth rate for the firm (g). The new dividend after 12 months will represent D1. The required rate of return (Ke) is 17 percent.
Compute the price of the stock (P0). (Do not round intermediate calculations. Round your answer to 2 decimal places.)
Stock Price: