Question
In: Finance
You are asked to value Houston Inc.'s common equity. Assume that Houston Inc. is a constant...
You are asked to value Houston Inc.'s common equity.
Assume that Houston Inc. is a constant growth company with a
required rate of return of 13 percent whose last dividend (D0,
which was paid yesterday) was $2.00, and whose dividend is expected
to grow indefinitely at a 7 percent rate.
a. What is the firm’s expected dividend stream over the next 3
years?
b. What is the firm’s current stock price?
c. What is the stock's expected value 1 year from
now?
d. What are the expected dividend yield, the capital gains yield,
and the total return for Houston Inc. during the first year.
Solutions
Expert Solution
a.
D1=2.00*(1+7%)=2.14
D2=2.00*(1+7%)^2=2.29
D3=2.00*(1+7%)^3=2.45
b.
What is the firm’s current stock price
=(2.00*(1+7%))/(13%-7%)
=35.67
c.
the stock's expected value 1 year from now
=35.67*(1+7%)=38.17
d.
the expected dividend yield=(2*(1+7%))/35.67=6.00%
the capital gains yield=dividend growth rate=7.00%
the total return for Houston Inc.=the capital gains yield+the expected dividend yield=7%+6%=13.00%
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