Author Question: Central Inc. has an 11.5 required rate of return. It does not expect to initiate dividends for 20 ... (Read 39 times)

ec501234 · **on:** Jul 10, 2018

Central Inc. has an 11.5 required rate of return. It does not expect to initiate dividends for 20 years, at which time it will pay 3.75 per share in dividends.

At that time, Central expects its dividends to grow at 6 forever. What is an estimate of Central's price in 20 years (P20) if its dividend at the end of year 20 is 3.75? What is its price in today's dollars if you desire a rate of return of 12?
What will be an ideal response?

Question 2

If the current price of Thaler-Made Furniture is 25 per share and next year's dividend is expected to be 1.75 per share, what is the required return if dividends are expected to grow 5 per year?

A) 24
B) 12
C) 32
D) 14
E) 2

meryzewe · **Reply #1 on:** Jul 10, 2018

Answer to Question 1

Answer: We use the formula: Price = Div20 . Inserting our values, we get: Price = P20 = 3.75 = = 72.2727 or about 72.27. To get today's price, we use the PVIF of with r = 0.12 and n =20 to get P0 = = 7.4923 or about 7.49.

Answer to Question 2

B