Question

Following are the securities and projections for Mogul Corp:

Stock A: REQUIRED RATE OF RETURN   = 5%

Constant-growth-growth rate of 3% D0= $3.00

Stock B: REQUIRED RATE OF RETURN   = 7%

D0= $4.00, growth at 5% per year for 2 years, followed by 4% forever

Stock C: REQUIRED RATE OF RETURN = 9%

D0= $2.00, growth at 25% for next 4 years, followed by 5% forever

Mogul has a 3.5% Treasury bond, semi-annual interest, with 4 years left to maturity and a quoted

price of $962.81.

REPLY POST: Question 3

1) Calculate the bond’s capital gain yield.

2) Calculate the value per share one year from today for stock A.

3) Calculate the value per share today for stock B.

4) 3) Do you agree with the stock valuation in part 4 of the primary post? If the stock was selling for $143.01 on January 1, 2018, would you purchase it? Use the correct stock valuation as the basis for your answer.

Answer 1

	1)	Bond's Capital gain Yield
		Quoted Price	$962.81
		Number of years to maturity	4
		Payment at redemption	$1,000
		Total capital gain Yield	3.86%	(1000/962.81)-1
		Annualized Capital gain yield	0.00952	((1000/962.81)^(1/4))-1
		Annualized Capital gain yield	0.95%
	2)	Value per share of Stock A after one year
	R	Required return	0.05
	g	Constant growth Rate	0.03
	D0	Dividend in year0	$3.00
	D1=D0*(1+g)	Dividend in year1	$3.09
	D2=D1*(1+g)	Dividend in year2	$3.18
	P0=D1/(R-g)	Price in year0(today)	$154.50	(3.09/(0.05-0.03)
	P1=D2/(R-g)	Price in year 1(one year from today)	$159.14	(3.18/(0.05-0.03)
	3)	Value per share today of Stock B
	R	Required return	0.07
	g	Growth Rate in year 1 and2	0.05
	D0	Dividend in year0	$4.00
	D1=D0*(1+g)	Dividend in year1	$4.20
	D2=D1*(1+g)	Dividend in year2	$4.41
	g1	Constant growth rate from year3 onwards	0.04
	D3=D2*(1+g1)	Dividend in year3	$4.59
	P2=D3/(R-g1)	Price at end of year 2	$152.88	(4.59/(0.07-0.04)
		Present Value (PV) of Cash Flow:
		(Cash Flow)/((1+i)^N)
		i=Discount Rate=Required Return=0.07
		N=Year of Cash Flow
		N	CF	PV=CF/(1.07^N)
		Year	Cash Flow	PV of Cash Flow
	D1	1	$4.20	3.93
	D2	2	$4.41	3.85
	P2	2	$152.88	133.53
			Total	141.31
		Price of share today=Present Value of Future Cash flows
	P0	Value per share today of Stock B	$141.31
	4)	If the stock was selling for $143.01, it is overpriced.
		It should not be purchased if Price is more than $141.31