Question

In: Finance

3. Stock Valuation A company’s stock just paid a dividend (D0) of $3.50 and the stock’s...

3. Stock Valuation

A company’s stock just paid a dividend (D0) of $3.50 and the stock’s dividends are expected to grow at a constant rate of 4.0% per year. The stock has a beta of 1.2, the risk-free rate is 2%, and the market risk premium is 7%.

a. Is this stock more or less risky than the market? Why?

b. Use the CAPM to compute the cost of equity/required return for the stock (rs)?

c. Use the constant-growth dividend discount model (DDM) to estimate what the price of the stock should be.

d. If you see that this stock is selling for $45.00, would you buy it? Why?

Expert Solution

Given about a stock,

Last dividend D0 = $3.5

Expected growth rate g = 4%

beta of stock = 1.2

a). We know that beta of market is 1. So, when a stock has higher beta with compared to market, it means that stock is more volatile as compared to the market. More volatile stocks have higher risk associated with them. So, yes stock is more risky than the market.

b). Risk free rate Rf = 2%

Market risk premium MRP = 7%

So, sing CAPM model, cost of equity of stock Ke = Rf + beta*MRP

=> Ke = 2 + 1.2*7 = 10.40%

So, cost of equity of stock is 10.40%

c). Using Dividend discount model, current price of the stock is given by formula

P0 = D0*(1+g)/(Ke - g) = 3.5*(1+0.04)/(0.104 - 0.04) = $56.88

the price of the stock should be $56.88

d). When actual price of the stock in market is $45, which is less than its intrinsic value. So stock is currently undervalued and is expected to reach it intrinsic value in near future. Sine it is expected to increase in short term, it is a buy.

jeff jeffy answered 2 years ago

Nonconstant growth valuation Holt Enterprises recently paid a dividend, D0, of $3.50. It expects to have...

Nonconstant growth valuation Holt Enterprises recently paid a dividend, D0, of $3.50. It expects to have nonconstant growth of 23% for 2 years followed by a constant rate of 6% thereafter. The firm's required return is 16%. How far away is the horizon date? The terminal, or horizon, date is Year 0 since the value of a common stock is the present value of all future expected dividends at time zero. The terminal, or horizon, date is the date when...

1. A stock just paid a dividend of D0 = $0.66. Dividend is expected to grow...

1. A stock just paid a dividend of D0 = $0.66. Dividend is expected to grow at a constant rate of 3.2%. The required rate of return is 15.7%. What is the current stock price? 2. XYZ stock is currently selling for $40.35 per share. The company just paid its first annual dividend of $4.08 a share. The firm plans to increase the dividend by 7 percent per year indefinitely. What is the expected return on XYZ stock?

A company has just paid a dividend of $ 3 per share, D0=$ 3 . It...

A company has just paid a dividend of $ 3 per share, D0=$ 3 . It is estimated that the company's dividend will grow at a rate of 18 % percent per year for the next 2 years, then the dividend will grow at a constant rate of 5 % thereafter. The company's stock has a beta equal to 1.4, the risk-free rate is 4.5 percent, and the market risk premium is 4 percent. What is your estimate of the...

A stock just paid a dividend of D0 = $8.50. The required rate of return is rs...

A stock just paid a dividend of D0 = $8.50. The required rate of return is rs = 12.3%, and the constant growth rateis g =6.0%. What is the stock’s intrinsic value?

You have the opportunity to buy a stock that just paid a dividend (D0) of $2.00....

You have the opportunity to buy a stock that just paid a dividend (D0) of $2.00. After doing some research, you have forecasted the following growth rates for the firm’s dividends: g1 = -40% g2 = 0% g3 = 50% g4 = 25% g5-infinity = 3% In addition, you estimate that the required return for this stock should be 8%. Show your work. Calculate the forecasted dividends for years 1 through 5 Calculate the forecasted stock price for year...

You are planning to buy a stock that has just paid a dividend (D0) of $2.50....

You are planning to buy a stock that has just paid a dividend (D0) of $2.50. In addition, you anticipate the following dividend growth rates: • Year 1 = 100% • Year 2 = 0% • Year 3 = -30% (note this is NEGATIVE 30%) • Year 4 = 20% • Years 5 through infinity = 4% Assume a discount rate of 10%. Based on this, what is the value of the stock today? (Hint: use the three-step process of...

Moody Farms just paid a dividend of $3.50 on its stock. The growth rate in dividends...

Moody Farms just paid a dividend of $3.50 on its stock. The growth rate in dividends is expected to be a constant 5 percent per year indefinitely. Investors require a return of 13 percent for the first three years, a return of 11 percent for the next three years, and a return of 9 percent thereafter. What is the current share price?

Holt Enterprises recently paid a dividend, D0, of $3.50. It expects to have nonconstant growth of...

Holt Enterprises recently paid a dividend, D0, of $3.50. It expects to have nonconstant growth of 21% for 2 years followed by a constant rate of 4% thereafter. The firm's required return is 14%. How far away is the horizon date? The terminal, or horizon, date is the date when the growth rate becomes nonconstant. This occurs at time zero. The terminal, or horizon, date is the date when the growth rate becomes constant. This occurs at the beginning of...

DPS CALCULATION Weston Corporation just paid a dividend of $3 a share (i.e., D0 = $3)....

DPS CALCULATION Weston Corporation just paid a dividend of $3 a share (i.e., D0 = $3). The dividend is expected to grow 8% a year for the next 3 years and then at 4% a year thereafter. What is the expected dividend per share for each of the next 5 years? Round your answers to two decimal places. D1 = $ D2 = $ D3 = $ D4 = $ D5 = $

Hubbard Industries just paid a common dividend, D0, of $1.90.

Quantitative Problem 1: Hubbard Industries just paid a common dividend, D0, of $1.90. It expects to grow at a constant rate of 4% per year. If investors require a 8% return on equity, what is the current price of Hubbard's common stock? Do not round intermediate calculations. Round your answer to the nearest cent.$ per shareZero Growth Stocks:The constant growth model is sufficiently general to handle the case of a zero growth stock, where the dividend is expected to remain constant...