Question

Answer the following in Excel. Show your work

Beryl Corporation (“BC”) recently paid a dividend of $2.75 per share. BC expects to grow its dividend at a current rate of 4.4% indefinitely. BC’s common stock is currently selling for $28.00 per share and your required rate of return is 9.25%.

i. Given your required return, what is the value of one share of BC common stock to you?

ii. Given the market price, what is the expected rate of return for BC’s common stock?

iii. Should you invest in BC common stock? Explain.

Answer 1

Part 1)

Stock Price :
The price is a reflection of the company's value – what the public is willing to pay for a piece of the company. It is nothing but present value of cash flows ( Div & Sale Price of Stock at future date) from it.

P = D1 / [ Ke - g ]
D1 - Div after 1 Year
P0 - Price Today
Ke - Required Ret
g - Growth rate

Particulars	Amount
D0	$   2.75
Growth rate	4.40%
Ke	9.25%

Price of Stock is nothing but PV of CFs from it.
Price = D1 / [ Ke - g ]
D1 = D0 ( 1 + g )
= $ 2.75 ( 1 + 0.044 )
= $ 2.75 ( 1.044 )
= $ 2.87

Price = D1 / [ Ke - g ]
= $ 2.87 / [ 9.25 % - 4.4 % ]
= $ 2.87 / [ 4.85 % ]
= $ 59.2

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

Part 2)

Particulars	Amount
D0	$   2.75
Growth rate	4.4%
Price	$ 28.00

Ke = [ D1 / P0 ] + g
D1 = D0 ( 1 + g )
= 2.75 * ( 1 + 0.044 )
= 2.75 * ( 1.044 )
= 2.87

Ke = [ D1 / P0 ] + g
= [ 2.87 / 28 ] + 0.044
= 0.1025 + 0.044
= 0.1465
I.e 14.65 %

Part 3)

From Part A

Fair Price is $ 59.20

Actual price is $ 28.00

As Fair Price > Actua Price, Stock is under priced. Hence adviced to buy.