Scribd
Upload
12 views4 pages

Ch8-Stock Valuation

stock valuation problem

Uploaded by

nour
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
12 views4 pages

Ch8-Stock Valuation

stock valuation problem

Uploaded by

nour
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
You are on page 1/ 4

CHAPTER 8

STOCK VAULATION problems


1- Flex Electronics is forecasted to pay a $5.00 dividend at the end of
year one and a $5.50 dividend at the end of year two. At the end of
the second year the stock will be sold for $121. If the discount rate
is 15%, what is the price of the stock?
P0 = 500/(1+.15) + 5.50+121 /(1+.15)2
=$100

2- Suppose TB Pirates, Inc., is expected to pay a $2 dividend in one


year. If the dividend is expected to grow at 5% per year and the
required return is 20%, what is the price?
P0 = 2 / (.2 - .05) = $13.33

3- What is the value of a stock that is expected to pay a constant


dividend of $2 per year if the required return is 15%?
Zero growth: 2 / .15 = 13.33

4- What if the company starts increasing dividends by 3% per year,


beginning with the next dividend? The required return stays at
15%.
Constant growth: 2(1.03) / (.15 - .03) = $17.17

5- Gordon Growth Company is expected to pay a dividend of $4 next


period, and dividends are expected to grow at 6% per year. The
required return is 16%. What is the current price?
P0 = 4 / (.16 - .06) = $40
Remember that we already have the dividend expected next year,
so we don’t multiply the dividend by 1+g
What is the price expected to be in year 4?
1
P4 = D4(1 + g) / (R – g) = D5 / (R – g)
P4 = 4(1+.06)4 / (.16 - .06) = 50.50
What is the implied return given the change in price during the
four year period?
50.50 = 40(1+return)4; return = 6%
The price is assumed to grow at the same rate as the dividends

6- Suppose a firm is expected to increase dividends by 20% in one


year and by 15% in two years. After that, dividends will increase at
a rate of 5% per year indefinitely. If the last dividend was $1 and
the required return is 20%, what is the price of the stock?
Remember that we have to find the PV of all expected future
dividends.
Compute the dividends until growth levels off
D1 = 1(1.2) = $1.20
D2 = 1.20(1.15) = $1.38
D3 = 1.38(1.05) = $1.449
Find the expected future price
P2 = D3 / (R – g) = 1.449 / (.2 - .05) = 9.66
Find the present value of the expected future cash flows
P0 = 1.20 / (1.2) + (1.38 + 9.66) / (1.2)2 = 8.67

7- XYZ stock currently sells for $50 per share. The next expected
annual dividend is $2, and the growth rate is 6%. What is the
expected rate of return on this stock?
If the required rate of return on this stock were 12%, what would
the stock price be, and what would the dividend yield be?
Expected return = 2/50 + .06 = .10
Price = 2/ (.12 - .06) = $33.33
Dividend yield = 2 / 33.33 = 6%

2
8- You observe a stock price of $18.75. You expect a dividend growth
rate of 5%, and the most recent dividend was $1.50. What is the
required return?
r = [1.5(1.05)/18.75] + .05 = 13.4%

9- Suppose a firm’s stock is selling for $10.50. It just paid a $1


dividend, and dividends are expected to grow at 5% per year.
What is the required return?
• R = [1(1.05)/10.50] + .05 = 15%
-What is the dividend yield?
1(1.05) / 10.50 = 10%
-What is the capital gains yield?
g =5%
10-A company has just paid a dividend of 30 cents per share and that
dividend is expected to grow at a rate of 10 per cent per annum
for the next three years, and at a rate of 3 per cent per annum
forever after that.
Assuming a required rate of return of 14 per cent, calculate the
current market price of the share.

3
D4
P3 =
r − g
$0 . 411
¿
0 . 14− 0 . 03
¿ $3 . 74
D1 D2 D3 P3
P0 = 1
+ 2
+ 3
+
( 1+ r ) ( 1+ r ) ( 1+ r ) ( 1+ r )3
$0 . 330 $0 .363 $0 .399 $3 .74
¿ + 2
+ 3
+
1 .14 ( 1. 14 ) ( 1. 14 ) ( 1. 14 )3
¿ $0 . 289+$0 .279+ $0. 269+$2 .524
¿ $3 . 36

You might also like