Question

King Waterbeds has an annual cash dividend policy that raises the dividend each year by 44​%. The most recent​ dividend, Div 0Div0​, was $ 0.45$0.45 per share. What is the​ stock's price if a. an investor wants a return of 66​%? b. an investor wants a return of 88​%? c. an investor wants a return of 1111​%? d. an investor wants a return of 1212​%? e. an investor wants a return of 1919​%? a. What is the​ stock's price if an investor wants a return of 66​%?

Answer 1

Answer:

a.- r= 6% Value: 23.40

$\frac{0.468}{0.06-0.04} = Intrinsic \: Value$

b.- r = 8% Value: 11.70

$\frac{0.468}{0.08-0.04} = Intrinsic \: Value$

c.- r = 11% Value: 6.69

$\frac{0.468}{0.11-0.04} = Intrinsic \: Value$

d.- r = 12% Value: 5.85

$\frac{0.468}{0.12-0.04} = Intrinsic \: Value$

e.- r= 19% Value: 3.12

$\frac{0.468}{0.19-0.04} = Intrinsic \: Value$

Explanation:

We will calcualte the gordon model for the different rates of return:

$\frac{divends_1}{return-growth} = Intrinsic \: Value$

Dividend_1 is next year dividends.

If dividends raise by 4% then:

0.45 x 1.04% = 0.468

now we calculate for the different returns: