# 1) Annual dividends of General Electric (GE) grew from $0.75 in 2001 to$1.12 in 2006. What was...

## Question:

1) Annual dividends of General Electric (GE) grew from $0.75 in 2001 to$1.12 in 2006. What was the annual growth rate?

2) Paychex Inc. (PAYX) recently paid a $0.90 dividend. The dividend is expected to grow at a 6 per cent rate. At a current stock price of$40.11, what is the return that shareholders are expecting?

3) A firm does not pay a dividend. It is expected to pay its first dividend of $0.35 per share in three years. This dividend will grow at 6 per cent indefinitely. Using an 11.5 per cent discount rate, compute the value of this stock. 4) A fast-growing firm recently paid a dividend of$0.25 per share. The dividend is expected to increase at a 15 per cent rate for the next 4 years. Afterwards, a more stable 6 per cent growth rate can be assumed. If a 15 per cent discount rate is appropriate for this stock, what is its value?

## Dividend Yield:

The dividend yield is essentially the return on investment for a stock without any capital gains. It is one of the telling metrics for dividend investors.

1. Annual growth rate of General Electric (GE)

The time period is between 2001 to 2006 which is 5 years. So, the growth rate can be calculated as

Annual growth rate = {eq}($1.12 /$0.75)^ {1/5} -1 * 100\\ ($1.49 ^{0.2} - 1 ) * 100\\ (1.0830 - 1) * 100\\ 0.0830 * 100 = 8.30\% {/eq} 2. Expected Return The formula for calculating the growth expected return can be given as Expected Return = (D1 / P0) + Growth where D1 is the dividend paid and P0 is the current stock price. • = (($0.90 * 106%) / $40.11) + 6% • =$0.954 / $40.11 + 0.06 • = 0.0238 + 0.06 • = 0.0838 or 8.38% The return expected by shareholders is 8.38%. 3. VALUE OF STOCK AT YEAR 3 Stock value = D4 / (Ke - Growth) where D4 is the dividend paid and Ke is the discount rate. • =$0.371 / (11.5% - 6%)
• = $0.371 / 5.5% • =$6.75

Value of the stock now:

• = ($6.75 * PVIF 11.5%), 3 Periods • =$6.75 * 0.7214
• = $4.87 4. Stock value Given information: • D0 =$0.25
• D1 = $0.29 • D2 =$0.33
• D3 = $0.38 • D4 =$0.44
• D5 = $0.51 Value of stock at year 4 = D5 / (Ke - Growth) • =$0.51 / (15% - 6%)
• = $0.51 / 9% • =$5.67

Value of stock now:

= {D1 * PVIF15%},1YR + {D2 * PVIF15%},2YR + {D3 * PVIF15%},3YR + {D4 * PVIF15%},4YR + {P4 * PVIF15%},4YR

= $0.29 * 0.8696 +$0.33 * 0.7561 + $0.38 * 0.6575 +$0.44 * 0.5718 + $5.67 * 0.5718 =$0.25 + $0.25 +$0.25 +$0.25 +$3.24

= \$4.24 