Question

You expect a share of stock to pay dividends of $2.10, $2.35, and $2.60 in each of the next 3 years. You believe the stock will sell for $33.00 at the end of the third year.

a. What is the stock price if the discount rate for the stock is 20%? (Do not round intermediate calculations. Round your answer to 2 decimal places.)

b. What is the dividend yield for year 1? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.)

c. What will be the dividend yield at the start of year 2? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.)

Answer 1

a

Stock
Discount rate	0.2
Year	0	1	2	3
Cash flow stream	0	2.1	2.35	35.6
Discounting factor	1	1.2	1.44	1.728
Discounted cash flows project	0	1.75	1.631944	20.60185
NPV = Sum of discounted cash flows
NPV Stock =	23.98 = price
Where
Discounting factor =	(1 + discount rate)^(Corresponding period in years)
Discounted Cashflow=	Cash flow stream/discounting factor

b

Stock
Discount rate	0.2
Year	0	1	2
Cash flow stream	0	2.35	35.6
Discounting factor	1	1.2	1.44
Discounted cash flows project	0	1.958333	24.72222
NPV = Sum of discounted cash flows
NPV Stock =	26.68
Where
Discounting factor =	(1 + discount rate)^(Corresponding period in years)
Discounted Cashflow=	Cash flow stream/discounting factor

Dividend yield = dividend/price =
2.1/26.68=

7.87%

c

Stock
Discount rate	0.2
Year	0	1
Cash flow stream	0	35.6
Discounting factor	1	1.2
Discounted cash flows project	0	29.66667
NPV = Sum of discounted cash flows
NPV Stock =	29.67
Where
Discounting factor =	(1 + discount rate)^(Corresponding period in years)
Discounted Cashflow=	Cash flow stream/discounting factor

Dividend yield = dividend/ price = 2.35/29.67=7.92%