Question

XYZ has been growing at a rate of 30% per year in recent years. This same supernormal growth is expected to last for another two years (30% for Year 0 to Year 1 and Year 1 to Year 2), then at a constant rate of 10% thereafter.

a. If D0 = RM1.80, rs = 12%, then what is XYZ’s stock worth today? What is the expected dividend yield and its capital gains yield at this time?

Answer 1

1]	Price of a stock is the present value of the expected dividends
	when discounted at the required rate of return of 12%.
	Year	Dividend	PVIF at 12%	PV at 12%
	0	$            1.800
	1	$            2.340	0.89286	$               2.09
	2	$            3.042	0.79719	$               2.43
	Sum of PV of dividends of years 1 to 2			$               4.51
	Continuing value of dividends at t2 = 3.042*1.10/(0.12-0.10) =			$         167.310
	PV of continuing value = 167.310*0.79719 =			$          133.38
	Price of the stock today = 167.31+133.38 =			$          137.89
2]	Price after 1 Year:
	Year	Dividend	PVIF at 12%	PV at 12%
	0	$            1.800
	1	$            2.340
	2	$            3.042	0.89286	$               2.72
	Sum of PV of dividends of year 1			$               2.72
	Continuing value of dividends at t1 = 3.312*1.07/(0.12-0.07) =			$       167.3100
	Pv of continuing value of dividends at t1 = 167.31*0.89286 =			$          149.38
	Price of the 1 year from today = 2.72+149.38 =			$          152.10
3]	Expected dividend yield = 2.34/137.89 =	1.70%
	Expected capital gains yield = 152.10/137.89-1 =	10.30%
	Expected total yield	12.00%