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S.P. Whitman Companys last dividend was $1.30. The dividend growth rate is expected to be constant ...

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S.P. Whitman Companys last dividend was $1.30. The dividend growth rate is expected to be constant ...

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, r_s? (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 r_s. You can make a guess as to r_s, 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 r_s,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%

Textbook

Financial Management: Theory and Practice

Edition: 4^th

Authors: Brigham, Ehrhardt, Gessaroli, Nason

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