Question

Finance tattletale news corp. has been growing at a rate of 20% per year, and you expect this growth rate in earnings and dividends to continue for another 3 years. the last dividend paid was $2. the discount rate is 15% and the steady growth rate after 3 years is 4%.
a. what is the capital gain in stock price from year 0 to year 1?

Answer 1

Answer:

$1.81

Explanation:

Applying the Non constant growth formula and the Gordon's model

The Non constant growth formula :

$P_{0} = \frac{D1V1}{1 + r} +\frac{D2V2}{(1+r)^{2} } +\frac{D3V3}{(1+r)^{3} } + \frac{DnVn}{(1+r)^{n} }$

D1V1 = dividend in year 1

D2V2 = dividend in year 2

r = discount rate

Po = price of stock at year 0

Pn = price of stock year n

therefore to get the stock price at year 0 and year 1 we will apply the above formula + the Gordon model formula

stock price year 0 = ($2.40 / 1.15) + ($2.88 / 1.15²) + ($3.456 / 1.15³) +[$4.1472 / (15% - 4%)] / 1.15⁴ = $2.09 + $2.18 + $2.27 + $21.55 = $28.09

stock price year 1 = ($2.88 / 1.15) + ($3.456 / 1.15²) +[$4.1472 / (15% - 4%)] / 1.15³ = $2.50 + $2.61 + $24.79 = $29.90

therefore the capital gain between year 0 and year 1

= P1( price of stock at year 1)- Po (price of stock at year 0)= $29.90 - $28.09 = $1.81

Answer 2

Answer:

$1.81

Explanation:

we must use a combination of non-constant growth formula and the Gordon growth model to determine the price for the stocks in year 0 and year 1:

stock price year 0 = ($2.40 / 1.15) + ($2.88 / 1.15²) + ($3.456 / 1.15³) +[$4.1472 / (15% - 4%)] / 1.15⁴ = $2.09 + $2.18 + $2.27 + $21.55 = $28.09

stock price year 1 = ($2.88 / 1.15) + ($3.456 / 1.15²) +[$4.1472 / (15% - 4%)] / 1.15³ = $2.50 + $2.61 + $24.79 = $29.90

capital gain between year 0 and year 1 = P1 - P0 = $29.90 - $28.09 = $1.81

*All answers have been rounded to the nearest cent.