(Q. 20 IN B) DEF CORP. HAS JUST PAID A $2 PER SHARE DIVIDEND. THE...

17. (Q. 20 in B) DEF corp. has just paid a $2 per share dividend. The dividend is projected to grow at 3% per year indefinitely. If the required rate of return on the stock is 9%, then by what percentage does P

1

exceed P

0

? A) 2%B) 3% C) 5.25% D) 9% Solution B Note that (P

1

– P

0

) / P

0

= (D

2

- D

1

) / D

1

= g = 3%. One can also compute the prices and their relative difference: The price P

0

today P

0

= D

1

/(r - g) = $2 × 1.03 / (0.09 - 0.03) = $2.06 / 0.06 = $34.33 per share The price P

1

in one year P

1

= D

2

/(r - g) P

1

= D

2

/(r - g) = ($2.06 × 1.03) / (0.09 - 0.03) = $35.36 per share % increase = (P

1

– P

0

) / P

0

= ($35.6 - $34.33) / $34.33 = 3%