A broker offers to sell you shares of Bay Area Healthcare

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A broker offers to sell you shares of Bay Area Healthcare, which just paid a dividend of 2 per share. The dividend is expected to grow at a constant rate of 5 percent per year. The stock's required rate of return is 12 percent. a. What is the expected dollar dividend over the next three years? b. What is the current value of the stock and the expected stock price at the end of each of the next three years? Solution: Given that Do 2 per share, g and r a. Expected value of dividend Year 1: D1 Do (1 g) 2() 2.1 Year 2: D2 D1 (1 g) 2.1() Year 3: D3 D2 (1 g) () b. Current value of stock, Po D1/(r g) Po 2.1/ ( ) Po 30 Expected stock price at the end of the year Year 1: P1 D2/(r ...

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Published On:
03/16/2017
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