Consider a stock that does not plan to pay dividends for the next ten years. The first dividend will be $2.50 (i.e. D11=$2.50). The company will maintain a constant dividend growth rate from that point forward of 4%. The required return on this stock is 9%.
a. What is the value of this stock?
b. What is the value of this stock 5 years from today?
c. What is the value of this stock 6 years from today?
d. What is the value of this stock 10 years from today?
e. What is the value of this stock 12 years from today?
f. Use the dividend yield and capital gains yield relationship to explain what happened between the earlier years and the later years and how the stock prices change.