Question

In: Finance

Five years ago a XYZ stock paid a $1.15 dividend. Since then it has split two...

Five years ago a XYZ stock paid a $1.15 dividend. Since then it has split two for one once and three for two twice. XYZ current earnings per share are $1.15, and the plowback ratio is 50%. The dividends are expected to grow with their historical rate for the next three years. Beginning year four, XYZ return on equity is expected to be 9%. If the firm’s appropriate discount rate is 13.5% what the stock price should be?

Solutions

Expert Solution

Answer:

Stock Price = $9.28

Working:

Dividend paid five years ago adjusted for stock splits (till today) = 1.15*(1/2)*(2/3)*(2/3) = $0.25556

Current year dividend = EPS * (1 - plowback ratio) = 1.15 * (1 - 50%) = $0.575

Dividend growth rate = (0.575 / 0.25556) 1/5 - 1

= 17.61%

Hence:

Dividends are expected to grow for the next three years =17.61%

Beginning Year 4:

Return on equity is expected to be = 9%

Given: Plow-back ratio = 50%

Sustainable growth rate = ROE * Plow-back ratio = 9% * 50% = 4.5%

Hence:

Dividends for year 1, year 2, year 3 and year 4 will be:

Value of share at the end year 3 = Year 4 dividend / (Discount rate - Growth rate) = $0.977500 / (13.5% - 4.5%) = $10.86111

Calculation of stock price:

jeff jeffy answered 1 year ago
Next > < Previous

Related Solutions

Five years ago a XYZ stock paid a $1.15 dividend. Since then it has split two...
Five years ago a XYZ stock paid a $1.15 dividend. Since then it has split two for one once and three for two twice. XYZ current earnings per share are $1.15, and the plowback ratio is 50%. The dividends are expected to grow with their historical rate for the next three years. Beginning year four, XYZ return on equity is expected to be 9%. If the firm’s appropriate discount rate is 13.5% what the stock price should be?
Five years ago a XYZ stock paid a $1.15 dividend. Since then it has split two...
Five years ago a XYZ stock paid a $1.15 dividend. Since then it has split two for one once and three for two twice. XYZ current earnings per share are $1.15, and the plowback ratio is 50%. The dividends are expected to grow with their historical rate for the next three years. Beginning year four, XYZ return on equity is expected to be 9%. If the firm’s appropriate discount rate is 13.5% what the stock price should be? (40 points)
Ten years ago a XYZ stock paid a $0.30 dividend. Since then it has split two...
Ten years ago a XYZ stock paid a $0.30 dividend. Since then it has split two for one three times and three for two twice. XYZ current earnings per share are $1.40, and the payout ratio is 30%. The dividends are expected to grow with their historical rate for the next three years. Beginning year four, XYZ return on equity is expected to be 12%. If the firm’s appropriate discount rate is 10.8% what the stock price should be?
Ten years ago a XYZ stock paid a $0.30 dividend. Since then it has split two...
Ten years ago a XYZ stock paid a $0.30 dividend. Since then it has split two for one three times and three for two twice. XYZ current earnings per share are $1.40, and the payout ratio is 30%. The dividends are expected to grow with their historical rate for the next three years. Beginning year four, XYZ return on equity is expected to be 12%. If the firm’s appropriate discount rate is 10.8% what the stock price should be?
Four years ago, XYZ company paid a dividend of $0.80 per share. Today XYZ paid a...
Four years ago, XYZ company paid a dividend of $0.80 per share. Today XYZ paid a dividend of $1.66 per share. It is expected that the company will pay dividends growing at this same rate for the next 5 years. Thereafter, the growth rate will level off at 8% per year. The current stock price is $30. If the required return on this stock remains at 18%, should you buy the stock? Please show all steps. Don't round off until...
Since Garnet Corporation was formed five years ago, its stock has been held as follows: 525...
Since Garnet Corporation was formed five years ago, its stock has been held as follows: 525 shares by Frank and 175 shares by Grace. Their basis in the stock is $350,000 for Frank and $150,000 for Grace. As part of a stock redemption, Garnet redeems 125 of Frank's shares for $175,000 and 125 of Grace's shares for $175,000. Round any division to six decimal places. Round your final answer to the nearest dollar. a. What are the tax consequences of...
Stock ABC recently paid a dividend of $1.15 per share. The dividend growth rate is expected to be 4.20%
Stock ABC recently paid a dividend of $1.15 per share. The dividend growth rate is expected to be 4.20% indefinitely. Stockholders require a rate of return of 11% on this stock. If the stock trades at a price of $16.7, what will your holding period return be if you buy it now and sell it after 2 years for the intrinsic value according to the constant growth dividend discount model?
Problem 13-43 (LO. 4) Since Garnet Corporation was formed five years ago, its stock has been...
Problem 13-43 (LO. 4) Since Garnet Corporation was formed five years ago, its stock has been held as follows: 525 shares by Frank and 175 shares by Grace. Their basis in the stock is $350,000 for Frank and $150,000 for Grace. As part of a stock redemption, Garnet redeems 125 of Frank's shares for $175,000 and 125 of Grace's shares for $175,000. Round any division to six decimal places. Round your final answer to the nearest dollar. a. What are...
A. Company XYZ has just paid a dividend of $3. As XYZ is a young company...
A. Company XYZ has just paid a dividend of $3. As XYZ is a young company and successful, it is estimated that they will grow at rate of 20% for 5 years and then at 3% in perpetuity. The company faces a required return on equity of 7%. What is the current price of the company’s stock using the DDM model? Use excel for all calculations​
Stock split versus stock dividend---Firm   Mammoth Corporation is considering a​ 3-for-2 stock split. It currently has...
Stock split versus stock dividend---Firm   Mammoth Corporation is considering a​ 3-for-2 stock split. It currently has the​ stockholders' equity position shown. The current stock price is​ $120 per share. The most recent​ period's earnings available for common stock is included in retained earnings. Preferred stock $ ​ 1,000,000 Common stock (130,000 shares at​ $5 ​par) 650,000 ​Paid-in capital in excess of par ​1,700,000 Retained earnings 10,000,000 Total​ stockholders' equity $13,350,000 a. What effect on​ Mammoth's equity account would result from...
ADVERTISEMENT
Subjects
ADVERTISEMENT
Latest Questions
ADVERTISEMENT