# a) Schnusenberg Corporation ne

a) Schnusenberg Corporation next dividend of D 1 =\$0.75 per share, and that dividend is expected to grow at aconstant rate of 6.50% per year in the future. The company’srequired return is 14.7%. What is the company’s current stockprice?

 a. \$12.56 b. \$9.15 c. \$6.88 d. \$8.80 e. \$12.74

b) Huang Company’s last dividend was \$1.25. The dividend growthrate is expected to be constant at 27.5% for 3 years, after whichdividends are expected to grow at a rate of 6% forever. If thefirm’s required return (r s) is 13%, what is its currentstock price?

 a. \$54.54 b. \$31.99 c. \$36.35 d. \$45.14 e. \$41.99

next dividend of D1 = \$0.75

dividend growth rate g = 6.5%

The company’s required return rs = 14.7%

So, value of stock today using constant dividend growth rate =D1/(rs-g) = 0.75/(0.147-0.065) = \$9.15

Option b is correct.

last dividend D0 = \$1.25.

The dividend growth rate is expected to be constant at 27.5% for3 years,

So, D1 = D0*1.275 = 1.25*1.275 = \$1.5938

D2 = D1*1.275 = 1.5938*1.275 = \$2.0320

D3 = D2*1.275 = 2.032*1.275 = \$2.5908

thereafter which dividends are expected to grow at a rate of 6%forever.

g = 6%

If the firm’s required return rs = 13%

So, value of stock at year 3 using constant dividend growth rateis

P3 = D3*(1+g)/(rs-g) = 2.5908*1.06/(0.13-0.06) = \$39.2327

So, stock price today is sum of PV of future dividends and P3discounted at rs

=> P0 = D1/(1+rs) + D2/(1+rs)^2 + D3/(1+rs)^3 +P3/(1+rs)^3

=> P0 = 1.5938/1.13 + 2.0320/1.13^2 + 2.5908/1.13^3 +39.2327/1.13^3 = \$31.99

Current stock price = \$31.99

option b is correct.

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