Q3 (A). You want to invest in the equity of Gateway Inc. which has just...
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Q3 (A). You want to invest in the equity of Gateway Inc. which has just announced a dividend of $7 per share on its common stock. Gateway also announced that it expects to increase the dividend at a 9% annual rate for the first two years and at a 5% rate for the next two years, and then grow the dividend at a 3% rate thereafter. Your required rate of return on the stock is 16%. Calculate the value of stock of Gateway Inc. as of today. (15) (B). Hogwarts corporation has historically earned 25% return on its investments. i. What will be Hogwarts's long-term dividend growth rate if it constantly pays out 30% earnings as dividends? ii. How would you change your answer if Hogwarts decides to distribute its entire earnings as dividend? (3 +2 = 5)
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