Question

1. Given the information in the table, what is TODAY’s price of the stock?

Today’s Dividend	$2.18
Discount Rate	10.00%
Growth rate in dividends 0 to 1	9.00%
Growth rate in dividends 1to 2	5.00%
Growth rate in dividends 2 to 3	5.00%
Growth rate in dividends 3 onward	4.00%

2.

Given the following information, what is the percentage dividend yield between today and period 1?

Today’s Dividend =	$4.91
Expected Growth rate in dividends =	4.72
Discount Rate (Required return) =	5.12

Calculate your answer to two decimal places (e.g., 2.51)

Answer 1

Part A:

Price of Stock = PV of CFs from it.

Div Calculation:

Year	Cash Flow / Div	Formula	Calculation
1	$                     2.38	D0 ( 1 + g)	2.18 ( 1 + 0.09 )
2	$                     2.50	D1 ( 1 + g)	2.38 * ( 1 + 0.05 )
3	$                     2.62	D2 ( 1 + g)	2.5 * ( 1 + 0.05 )
4	$                     2.72	D3 ( 1 + g)	2.62 * ( 1 + 0.04 )

Price after 3 Years:

Price of Stock is nothing but PV of CFs from it.
P3 = D4 / [ Ke - g ]
= $ 2.72 / [ 10 % - 4 % ]
= $ 2.72 / [ 6 % ]
= $ 45.41

P3- Price after 3 Years
D4 - DIv after 4 Years
Ke - Required Ret
g - Growth Rate

Price Today:

Year	Particulars	Cash Flow	PVF @10 %	Disc CF
1	D1	$      2.38	0.9091	$              2.16
2	D2	$      2.50	0.8264	$              2.06
3	D3	$      2.62	0.7513	$              1.97
3	P3	$   45.41	0.7513	$           34.12
Price				$           40.31

Part B:

Price of STock = PV of CFs from it.

Particulars	Amount
D0	$   4.91
Growth rate	4.72%
Ke	5.12%

Price of Stock is nothing but PV of CFs from it.
Price = D1 / [ Ke - g ]
D1 = D0 ( 1 + g )
= $ 4.91 ( 1 + 0.0472 )
= $ 4.91 ( 1.0472 )
= $ 5.14

Price = D1 / [ Ke - g ]
= $ 5.14 / [ 5.12 % - 4.72 % ]
= $ 5.14 / [ 0.4 % ]
= $ 1285.44

Where
D0 = Just Paid Div
D1 = Expected Div after 1 Year
P0 = Price Today
Ke = Required Ret
g = Growth Rate

Div Yield = D1 / P0

D1- Div after 1 Years

P0 - Price Today

Div Yield = D1 / P0

= 5.14 / 1285.44

= 0.004 I.e 0.4%