Question

In: Accounting

TechSvx earned $5.00 per share and paid a $4.00 dividend per share last year, and is...

TechSvx earned $5.00 per share and paid a $4.00 dividend per share last year, and is expected to continue to pay out 80% of its earnings as dividends for the foreseeable future. The firm is expected to generate a 14% return on equity in the future, and you require a 15% return on the stock.

a. What should be the value of the stock today (according to the constant growth rate dividend discount model)?

b. What should be the value of the stock one year from today? Is it higher or lower than today’s price? Explain why this is the pattern, intuitively.

Solutions

Expert Solution

value of the stock( Today)
Growth rate = ROE*Retention Ratio
Growth rate = 14%*(1-80%)
Growth rate = 2.8%
value of the stock = Expected Dividend(Next year)/(Expected Required Return - Growth rate
value of the stock( Today) = 4*(1+2.80%)/(13%-2.80%)
                                           =4.112/10.20%
value of the stock = $ 40.31 Per Shares
value of the stock one year from today
value of the stock = Expected Dividend( year 2)/(Expected Required Return - Growth rate)
Expected Dividend(Year 2)
   =4*(1+2.80%)(1+2.80%)
=$4.227
value of the stock = 4.227/(13%-2.80%)
                              =4.227/10.20%
value of the stock one year from today = $ 44.44 Per Shares
it is higher than today’s price

ekkarill92 answered 2 years ago
Next > < Previous

Related Solutions

Johnson Products earned $4.30 per share last year and paid a dividend of $1.65 per share....
Johnson Products earned $4.30 per share last year and paid a dividend of $1.65 per share. If ROE was 16 percent, what is the sustainable growth rate?
Johnson Products earned $4.30 per share last year and paid a dividend of $1.65 per share....
Johnson Products earned $4.30 per share last year and paid a dividend of $1.65 per share. If ROE was 16 percent, what is the sustainable growth rate? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.) Sustanable growth rate:
The Baron Basketball Company (BBC) earned $9 a share last year and paid a dividend of...
The Baron Basketball Company (BBC) earned $9 a share last year and paid a dividend of $6 a share. Next year, you expect BBC to earn $10 and continue its payout ratio. Assume that you expect to sell the stock for $140 a year from now. Do not round intermediate calculations. Round your answers to the nearest cent. If you require 10 percent on this stock, how much would you be willing to pay for it? $ If you expect...
Schlumberger is selling for $64.91 per share and paid a dividend of $1.10 last year.
(Common stock valuation) Schlumberger is selling for $64.91 per share and paid a dividend of $1.10 last year. The dividend is expected to grow at 4 percent indefinitely. What is the stock’s expected rate of return?
Warf Co. just paid a dividend of $4.00 per share. The company will increase its dividend...
Warf Co. just paid a dividend of $4.00 per share. The company will increase its dividend by 20 percent next year and will then reduce its dividend growth rate by 5 percentage points per year until it reaches the industry average of 5 percent, after which the company will keep a constant growth rate, forever. If the required return on Warf stock is 13 percent. Required: a) what will a share of stock sell for today? b) What conditions must...
The stock of AMD Graphics Co. paid a dividend of $0.6 per share last year on...
The stock of AMD Graphics Co. paid a dividend of $0.6 per share last year on earnings of $1.00 per share. The firm’s dividends and earnings are expected to growth at 7% per year forever. Shareholders require a return of 10% on their investment. Assuming the payout ratio is constant, the justified leading P/E ratio is: a. 20.0 b. 12.0 c. 12.8 d. 9.0 e. 8.6
Q1) Last year, a company paid a dividend of $0.75 per share. Dividends for the next...
Q1) Last year, a company paid a dividend of $0.75 per share. Dividends for the next year, will increase by 167% and then by 50% in the following year. After that, dividends are expected to grow at a constant rate of 10% every year. If the required return for investments of similar risk is 15% and the market price of the stock is $55, would you buy the stock today? Explain your answer.
Amco Pty Ltd last paid a dividend of $0.20 per share. This dividend is expected to...
Amco Pty Ltd last paid a dividend of $0.20 per share. This dividend is expected to grow at 15% per annum for three years, then at 10% per annum for the next three years, after which it is expected to grow at a 5% rate forever. a. What is the price you would pay for the share if your required rate of return is 10%? b. Would the price change if you expected to hold the share for only three...
Last year, Wilderness Adventures paid an annual dividend of $3.70 per share. The firm recently announced...
Last year, Wilderness Adventures paid an annual dividend of $3.70 per share. The firm recently announced that it will increase its dividend by a constant 12.5 percent annually. What is one share of this stock worth today at a required rate of 17.8 percent? $78.05 $79.63 $78.54 $79.75 Excelor stock is expected to pay $2.80 per share as its next annual dividend. The firm has a policy of increasing the dividend by 10.0 percent annually. The stock has a market...
A company’s last dividend was $1.50 per share at the end of the year. For the...
A company’s last dividend was $1.50 per share at the end of the year. For the next three years, the growth rate is expected to be 23% per year, after which the growth rate is expected to continue at a constant rate of 7% per share. Shareholders require 12% rate of return. What would you be willing to pay for this stock today? Show the answer by hand not using excel.
ADVERTISEMENT
Subjects
ADVERTISEMENT
Latest Questions
ADVERTISEMENT