Sunny Side Corporation paid a $2 per share dividend yesterday. You expect the dividend to grow steadily at a rate of 10 percent per year. a. What is the expected dividend in each of the next four years? b. At what price will the stock sell if the discount rate for the stock is 15 percent? c. What is the expected stock price 4 years from now? d. If you buy the stock and plan to hold it for 4 years, what is the amount you will receive at the end of the period?

a. Given, Dividend already paid, D0=$2

Year1=D1=D0*(1+growth rate)=2*(1+10%)=2*1.1=$2.2

Year2=D2=D1*(1+growth rate)=2.2*(1+10%)=2.2*1.1=$2.42

Year3=D3=D2*(1+growth rate)=2.42*(1+10%)=2.42*1.1=$2.662

Year4=D4=D3*(1+growth rate)=2.662*(1+10%)=2.662*1.1=$2.9282

b. Price of the Stock today, formula=D1/(discount rate-growth rate)=2.2/(15%-10%)=2.2/5%=44.0

Therefore, the Stock Price=$44.0

c. Price of the stock in 4 years (P4)=D5/(discount rate-growth rate)

D5=D4*(1+growth rate)=2.9282*(1+10%)=2.9282*1.1=3.22102

Price of the stock in 4 years (P4)=3.22102/(15%-10%)=3.22102/5%=64.42

Therefore, Price of the stock in 4 years=$64.42

d. The amount you receive after 4 years= Price of the stock in 4 years-Price of the stock today=$64.42-$44.0=$20.42