1) Using the Generalized Dividend Pricing Model, solve for the present value of a stock that pays $4 in dividends per year and you can expect to sell for $40 at any time in the future. You have an internal interest rate of 7%
a. What is the present value if you plan to hold the stock for one year?
b. What is the present value if you plan to hold the stock for 3 years?
c. What is the present value if you plan to hold the stock for 5 years?
2) Using the Gordon Growth Model, solve for the present value of each type of stock. Your internal rate of return is 10%.
a. $3 annual dividends that grow at 4% per year
b. $2 annual dividends that grow at 5% per year
c. $1 annual dividends that grow at 6% per year