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

D1=2.00*(1+7%)=2.14

D2=2.00*(1+7%)^2=2.29

D3=2.00*(1+7%)^3=2.45

What is the firm’s current stock price

=(2.00*(1+7%))/(13%-7%)

=35.67

the stock's expected value 1 year from now

=35.67*(1+7%)=38.17

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%

jeff jeffy answered 2 years ago

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