What is the growth rate in dividends for Red, Inc., Yellow Corp. and Blue Company?

  

Red, Inc., Yellow Corp., and Blue Company each will pay a dividend of $3.20 next year. The growth rate in dividends for all three companies is 5 percent. The required return for each companys stock is 8 percent, 11 percent, and 14 percent, respectively. What is the stock price for each company? (Do not round intermediate calculations. Round your answers to 2 decimal places (e.g., 32.16).) Stock priceRed, Inc.$ Yellow Corp.$ Blue Company$

Introduction:

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Investing in stocks requires an in-depth understanding of the factors that affect their price. One of the most important factors is the dividend payment offered by the company. Moreover, the growth rate in dividends and the required return are also significant determinants of stock prices. In this article, we will examine the stock prices of Red, Inc., Yellow Corp., and Blue Company based on their dividend payments, growth rates, and required returns.

Description:

Red, Inc., Yellow Corp., and Blue Company are three firms that will pay a dividend of $3.20 per share next year. All of these companies have a dividend growth rate of 5 percent. However, the required return for each company’s stock is different. Red, Inc.’s required return is 8 percent, Yellow Corp.’s required return is 11 percent, and Blue Company’s required return is 14 percent. The question that arises is, what is the stock price of each company? To calculate this, we need to use the dividend discount model (DDM). By applying DDM, we can determine the present value of future dividends and then add it to the present value of the expected stock price in the future. The calculation reveals that Red, Inc.’s stock price is $85, Yellow Corp.’s stock price is $68.63, and Blue Company’s stock price is $54.29. These findings suggest that the higher the required return, the lower the stock price, ceteris paribus.

Objectives: In this lesson, we will learn about the valuation of stocks and understand how to compute the stock price for companies with different required returns.

Learning Outcomes:
1. Students will be able to calculate the stock price for companies with a given dividend and growth rate.
2. Students will be able to identify the relationship between required return and stock price.
3. Students will be able to compare and contrast the stock prices of different companies with varying required returns.

Headings:
1. Introduction to Stock Valuation
2. Calculation of Stock Price
3. Relationship between Required Return and Stock Price
4. Comparison of Stock Prices for Different Companies.

Solution 1:

To calculate the stock price of Red, Inc, we can use the Gordon Growth Model, which is based on the formula:

Stock price = Dividend / (Required return – Dividend growth rate)

So, for Red, Inc, the stock price would be:

Stock price = 3.20 / (0.08 – 0.05) = $106.67

Therefore, the stock price of Red, Inc is $106.67.

Solution 2:

Similarly, to calculate the stock price of Yellow Corp, we can use the same Gordon Growth Model formula:

Stock price = Dividend / (Required return – Dividend growth rate)

So, for Yellow Corp, the stock price would be:

Stock price = 3.20 / (0.11 – 0.05) = $64.00

Therefore, the stock price of Yellow Corp is $64.00.

Lastly, to calculate the stock price of Blue Company, we can use the same Gordon Growth Model formula:

Stock price = Dividend / (Required return – Dividend growth rate)

So, for Blue Company, the stock price would be:

Stock price = 3.20 / (0.14 – 0.05) = $35.56

Therefore, the stock price of Blue Company is $35.56.

Suggested Resources/Books:

1. “Valuation: Measuring and Managing the Value of Companies” by McKinsey and Company
2. “Investment Valuation: Tools and Techniques for Determining the Value of any Asset” by Aswath Damodaran
3. “The Intelligent Investor: The Definitive Book on Value Investing” by Benjamin Graham
4. “Security Analysis: Principles and Techniques” by Benjamin Graham and David Dodd
5. “Stocks for the Long Run: The Definitive Guide to Financial Market Returns & Long-Term Investment Strategies” by Jeremy Siegel

Similar Asked Questions:

1. What are some common methods for valuing stocks?
2. How do you calculate the required return for a stock?
3. What is the difference between dividend yield and dividend growth rate?
4. How do changes in required return impact stock prices?
5. What factors should be considered when evaluating a company’s stock price?

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