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Ford Motor Company just paid a dividend of $1.80 per share and its stock has...

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Finance

Ford Motor Company just paid a dividend of $1.80 per share and its stock has a beta of 1.2. Risk free rate is 4% and expected return of the stock market is 12%. Ford wants to change its dividend policy to one of the two alternatives, what will be todays stock price under each situation?

  1. Keep plowback ratio at 100% for the next 5 years. At the end of the sixth year, Ford will pay a $3 per share dividend and after that future dividend will increase 8% per year indefinitely
  2. Decrease its dividend by 5% next year, then another decrease by 10% in year two. After that, the dividend will increase at a rate of 8% per year indefinitely.

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