Author Question: Mind-The-Gap Corp. is selling for 30 a share. In looking at the stream of dividends over the past ... (Read 65 times)

beccaep · **on:** Jul 10, 2018

Mind-The-Gap Corp. is selling for 30 a share. In looking at the stream of dividends over the past ten years, you find out that the first dividend was 1.00 and the last dividend was 2.00. What is the firm's growth rate of dividends?

What is the firm's expected return?
What will be an ideal response?

Question 2

Famous Antiquities Inc. is selling for 48 per share. In looking at the stream of dividends over the past seven years, you find out that the first dividend was 0.50 and the last dividend was 3.85. What is the firm's growth rate of dividends?

What is the firm's expected return?
What will be an ideal response?

peter · **Reply #1 on:** Jul 10, 2018

Answer to Question 1

Answer:
Using the formula g = - 1, where FV = 2 is the most recent dividend and PV = 1 is the initial dividend and n = 10, we get g = - 1 = - 1 = 1.071773 - 1 = 0.071773, or about 7.18. OR: One could use the TVM keys with N = 10, PV = -1, FV = 2, and PMT = 0 to get I/Y = 7.1773 or about 7.18. To get the expected return (r), we use the formula: r = + g. Inserting our values, we get: r = + 0.071773 = 0.143225, or about 14.32.

Answer to Question 2

Answer:
Using the formula g = - 1, where FV = 3.85 is the most recent dividend and PV = 0.50 is the initial dividend and n = 7, we get g = - 1 = (3.85/0.50)(1/7) - 1 = 1.3385714 - 1 = 0.3385714, or about 33.86. OR: One could use the TVM keys with N = 7, PV = -0.50, FV = 3.85, and PMT = 0 to get I/Y = 33.8571 or about 33.86. To get the expected return (r), we use the formula: r = + g. Inserting our values, we get: r = (3.85 1.3386)/48 + 0.3386 = 0.10737 + 0.3386 = 0.44597, or about 44.60.