Question

In: Finance

1. Dividend discount model: Company X is expected to pay an end-of-year dividend of $8 a...

1. Dividend discount model: Company X is expected to pay an end-of-year dividend of $8 a share. After the dividend, its stock is expected to sell at $105. If the market capitalization rate is 10%, what is the current stock price? 2. Dividend discount model: Consider the following three stocks: a) Stock A is expected to provide a dividend of $10 a share forever. b) Stock B is expected to pay a dividend of $5 next year. Thereafter, dividend growth is expected to be 4% a year forever. c) Stock C is expected to pay a dividend of $5 next year. Thereafter, dividend growth is expected to be 20% a year for five years (i.e., years 2 through 6) and zero thereafter. If the market capitalization rate for each stock is 10%, which stock is the most valuable? What if the capitalization rate is 6%?

Solutions

Expert Solution

1
Market Capitalization Rate=10% 0.1
D1 Dividend in yer 1 $8
P1 Market Value of share in year 1 $105
D1/(1+0.1) Present value of Dividend $7.27
P1/(1+0.1) Present value of market value in year1 $95.45
P0 Current Stock Price=7.27+95.45= $102.73
Current Stock Price $102.73
2
R Market Capitalization Rate=10% 0.1
D a)Amount of dividend forever $10
P0=D/R Current Stock Price of tockA $100
b)
D1 Dividend Next year $5
g Dividend growth rate=4% 0.04
P0=D1/(R-g) Current Stock Price of StockB $83.33
c) N A PV=A/((1+R)^N)
Year Cash Flow Present Value of Cash Flow
Dividend in year1 D1 1 $5 $4.55
Dividend in year2 D2=D1*1.2 2 $6.0 $4.96
Dividend in year3 D3=D2*1.2 3 $7.2 $5.41
Dividend in year4 D4=D3*1.2 4 $8.6 $5.90
Dividend in year5 D5=D4*1.2 5 $10.4 $6.44
Dividend in year6 D6=D5*1.2 6 $12.4 $7.02
Price at Year 6 P6=D7/0.1 6 $124.0 $69.99
SUM $104.27
Dividend in year7 D7 7 $12.4
P0 Current Price =Sum of PV of cash flows= $104.27
Current Price of StockC $104.27
Stock C has the highest stock price
Market Capitalization Rate=6%
R Market Capitalization Rate=6% 0.06
D a)Amount of dividend forever $10
P0=D/R Current Stock Price of A $167
b)
D1 Dividend Next year $5
g Dividend growth rate=4% 0.04
P0=D1/(R-g) Current Stock Price of stockB $250.00
c) N A PV=A/((1+R)^N)
Year Cash Flow Present Value of Cash Flow
Dividend in year1 D1 1 $5 $4.72
Dividend in year2 D2=D1*1.2 2 $6.0 $5.34
Dividend in year3 D3=D2*1.2 3 $7.2 $6.05
Dividend in year4 D4=D3*1.2 4 $8.6 $6.84
Dividend in year5 D5=D4*1.2 5 $10.4 $7.75
Dividend in year6 D6=D5*1.2 6 $12.4 $8.77
Price at Year 6 P6=D7/0.1 6 $206.7 $145.69
SUM $185.16
Dividend in year7 D7 7 $12.4
P0 Current Price =Sum of PV of cash flows= $185.16
Current Price of Stock C $185.16
Stock B has the highest stock price

Related Solutions

A stock is expected to pay a year-end dividend of $8 and then to sell at...
A stock is expected to pay a year-end dividend of $8 and then to sell at a price of $109. The risk-free interest rate is 4%, the expected market return is 12% and the stock has a beta of 0.8. What is the stock price today? Multiple Choice $102.99. $98.73. $105.98. $109.00.
A stock is expected to pay a dividend of $1 at the end of the year....
A stock is expected to pay a dividend of $1 at the end of the year. The required rate of return is rs = 11%, and the expected constant growth rate is 5%. What is the current stock price? Select one: a. $16.67 b. $18.83 c. $21.67 d. $23.33 e. $20.00 The primary operating goal of a publicly-owned firm interested in serving its stockholders should be to Select one: a. Maximize its expected total corporate income b. Maximize its expected...
A stock is expected to pay a dividend of $0.71 at the end of the year....
A stock is expected to pay a dividend of $0.71 at the end of the year. The dividend is expected to grow at a constant rate of 7.9%. The required rate of return is 12.3%. What is the stock's current price? Note: Enter your answer rounded off to two decimal points. Do not enter $ or comma in the answer box. For example, if your answer is $12.345 then enter as 12.35 in the answer box.
A stock is expected to pay a dividend of $1.06 at the end of the year....
A stock is expected to pay a dividend of $1.06 at the end of the year. The dividend is expected to grow at a constant rate of 7.7%. The required rate of return is 10.3%. What is the stock's current price? Note: Enter your answer rounded off to two decimal points. Do not enter $ or comma in the answer box. For example, if your answer is $12.345 then enter as 12.35 in the answer box.
A stock is expected to pay a dividend of $1.25 at the end of the year...
A stock is expected to pay a dividend of $1.25 at the end of the year (i.e., D1 = $1.25), and it should continue to grow at a constant rate of 7% a year. If its required return is 12%, what is the stock's expected price 5 years from today? Do not round intermediate calculations. Round your answer to the nearest cent.
A share is expected to pay a dividend of $2 in 1 year and $3 in 2 years. Then the dividend will grow at 8% p.a. until the end of year 4.
A share is expected to pay a dividend of $2 in 1 year and $3 in 2 years. Then the dividend will grow at 8% p.a. until the end of year 4. After that, the growth rate would become 3% p.a. forever. The rate of return is 11% p.a. effective. Using the dividend discount model (DDM), calculate the value of the share today. (Round your answer to the nearest cent.)
Lifecycle Motorcycle Company is expected to pay a dividend in year 1 of $2, a dividend...
Lifecycle Motorcycle Company is expected to pay a dividend in year 1 of $2, a dividend in year 2 of $3, and a dividend in year 3 of $4. After year 3, dividends are expected to grow at the rate of 7% per year. An appropriate required return for the stock is 12%. Using the multistage DDM, the stock should be worth __________ today. $85.60 $65.13 $63.80 $67.95
Lifecycle Motorcycle Company is expected to pay a dividend in year 1 of $2, a dividend...
Lifecycle Motorcycle Company is expected to pay a dividend in year 1 of $2, a dividend in year 2 of $3, and a dividend in year 3 of $4. After year 3, dividends are expected to grow at the rate of 7% per year. An appropriate required return for the stock is 12%. Using the multistage DDM, the stock should be worth __________ today.
15) A stock is expected to pay a dividend of $3.00 at the end of the...
15) A stock is expected to pay a dividend of $3.00 at the end of the year (i.e., D1 = $3.00), and it should continue to grow at a constant rate of 9% a year. If its required return is 15%, what is the stock's expected price 1 year from today? Do not round intermediate calculations. Round your answer to the nearest cent. 16) You are considering an investment in Justus Corporation's stock, which is expected to pay a dividend...
Old Quartz Gold Mining Company is expected to pay a dividend of $8 in the coming...
Old Quartz Gold Mining Company is expected to pay a dividend of $8 in the coming year. Dividends are expected to decline at the rate of 3% per year (negative growth rate). The risk-free rate is 6% and the market risk premium is 8%. The stock of Old Quartz Gold Mining Company has beta of 0.25. The intrinsic value of the stock is A. $163.33 B. $81.33 C. $133.33 D. $72.73
ADVERTISEMENT
ADVERTISEMENT
ADVERTISEMENT