Blue Bird’s common stock does not currently pay a cash dividend, but you expect them to begin paying dividends 10 years from today. You expect that the first dividend will be $2.71 per share. Thereafter, you expect dividends will increase at an annual rate of 6% per year. Given it’s risk, you’ve estimated the fair return on the stock to be 10.7% when measured as an effective annual rate. What do you expect the price of the stock to be immediately before the 5th dividend is paid? Provide an answer with at least 4 digits of precision.

b) Blue Lagoon’s common stock currently trades at $63.41 per share. It pays dividends once a year. The next dividend, due one year from today, is expected to be $1.83 per share. If you buy the stock and hold it forever, you expect to earn an IRR of 8.83% per year – which is also equal to its fair rate of return, E(r), given its risk.

Blue Lagoon does not, nor does it plan to, buy-back stock or issue new shares of stock. It’s ROE of 11.5% per year is expected to remain constant forever. Historically, its dividend payout ratio has remained constant, and it’s expected to remain so in the future.

Determine the dividend payout ratio of the stock.

Provide an answer as a percentage


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