Question

In: Finance

You expect a share of stock to pay dividends of $1.40, $1.65, and $1.90 in each...

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?

Solutions

Expert Solution

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%


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