IBIS Corporation has had dividends grow from $2.50 per share to $5.00

QUESTION

IBIS Corporation has had dividends grow from $2.50 per share to $5.00 per share over the last 10years (the $5.00 per share dividend was paid yesterday; that is, D0 = $5.00). This compounded annualgrowth rate in dividends is expected to continue into the future forever. If the current market price of
As it is compunded growth of dividen from $2.50 to $5 in 10 yrs, we have FV = PV*(1 i)^n ie 5.00 = 2.50*(1 i)^10 ie (1 i)^10 = 2 ie 10Log(1 i) = log 2 = 0.6931 ie Log(1 i) = 0.06931 ie 1 i = 1.0718 ie i = 7.18% = g = Growth in dividend pe ryear We also know that P0 =

Do(1 g)/(Ks-g) where Ks is reqd rate of return So we get Ks = D0(1 g)/P0 g = 5*(1 7.18%)/35 7.18% = 0.15 0.0718 = 22.49% So investor can expect 22.49% return on buying BIS stock

ANSWER:

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