Question: 1. ABC Corp is expected to have a share price of $75 dollars and a dividend of $5.00 next year. If the required return of equity is 7% what is the current estimated share price? If the stock is actually selling for $79 today would it be a good investment? Explain.
2. XYZ Corp has a required return on equity of 11%. We estimate that dividends are going to grow at a constant rate of 3%. If XYZ Corp just paid a dividend of $2.5 what is their estimated current share price?
3. Questions 1 and 2 required using different dividend discount models to find the estimated current share price. Explain three different reasons why the estimated share price might not be accurate. What could you do to improve the accuracy of the models?