S.P. Whitman Company’s last dividend was $1.30. The dividend growth rate is expected to be constant at 12% for 3 years, after which dividends are expected to grow at a rate of 8% forever. The current stock price is $18. What is Whitman’s required return, rs? (Hint: Forecast the dividends for Years 1 to 4. Then you must find the discount rate that causes the PVs of the dividends at t = 1, t = 2, and t = 3 plus the price at t = 3, P3, to equal the actual known price. However, you must first estimate P3, and that requires an estimate of rs. You can make a guess as to rs, find P3using it, then discount the dividends and the estimated P3at that rate. If the sum does not equal the known price, then change the value used for rs,and continue until you get P0. This is a laborious, time-consuming process with a calculator, but it’s easy with Excel.)
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16.63%
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16.95%
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17.23%
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17.50%
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