In: Finance
You expect a share of stock to pay dividends of $1.40, $1.65, and $1.90 in each of the next 3 years. You believe the stock will sell for $19.00 at the end of the third year.
a. What is the stock price if the discount rate for the stock is 20%?
b. What is the dividend yield for year 1?
c. What will be the dividend yield at the start of year 2?
Part A:
Stock Price = PV of Cash flows from it.
Year | CF | PVF @20% | Disc CF |
1 | $ 1.40 | 0.8333 | $ 1.17 |
2 | $ 1.65 | 0.6944 | $ 1.15 |
3 | $ 1.90 | 0.5787 | $ 1.10 |
3 | $ 19.00 | 0.5787 | $ 11.00 |
Price of Stock | $ 14.41 |
Part B:
DIv Yield = Div / Price
= $ 1.40 / $ 14.41
= 0.0972 i.e 9.72%
Part C:
P1 = PV of Future CFs
Year | CF | PVF @20% | Disc CF |
2 | $ 1.65 | 0.8333 | $ 1.38 |
3 | $ 1.90 | 0.6944 | $ 1.32 |
3 | $ 19.00 | 0.6944 | $ 13.19 |
P1 | $ 15.89 |
Div Yield for Year 2 = D2 / P1
= 1.65 / 15.89
= 0.1038 i.e 10.38%