Today is January 2, 2017. A construction company named LewCo pays an annual dividend on the last trading day of each year. The company paid a dividend of $3.00 per share 2 days ago. The dividend has grown by 5% per year since the company started in 1958. The current stock price of LewCo is $50 per share.
a. What expected return (discount rate, cost of capital) are investors attaching to LewCo based on the dividend discount model? We labeled this r* in class.
b. Based on the model, what will be the value of the company on January 2, 2018, a year from now?
c. Assume an investor purchased $1,000 of LewCo stock on January 2, 2017 and liquidated (sold) it a year later (price from part b.) after receiving the dividend payment. What is the price return and what is the total return on the investment?