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Bus 512B Problem Set 8 1. Suppose we have a non-growth stock paying a constant dividend of $4 per year, an example of this would be a preferred stock. If the cost of equity is 15%, what should be the price of this stock? Based on next year’s expected dividend of $4, and that this stock is intended to pay this dividend in perpetuity: $4 PE $26.67 .15 2. Suppose you are holding a stock that just paid a $4 dividend, has an expected constant grow rate of 3%, and a cost of equity of 15%. What should be the price of that stock today? Based on next year’s expected dividend of $4.12: PE $41.03 $4.12 $34.33 .15 .03 .12 3. Suppose we have a firm that is assumed to have a dividend growth rate of 20% for the next three years, then 3% per year afterward. The cost of equity is assumed to be 15%. Assume that the stock recently paid a dividend of $5. The Compute the value of the stock. This is just the PV of the first three payments + the PV (in year 3) of the perpetuity in growth starting in year 4, PRESENT VALUED back to year 0: 3 PE t 1 5 1.20 t 1.15 t 5 1.20 3 1.03 1 $48.76 16.34 $65.10 .15 .03 1.15 3 1