Varigrowth Inc. just paid a dividend of ?$1.38 ?(i.e., D0? = ?$1.38?). Such divi
ID: 2617107 • Letter: V
Question
Varigrowth Inc. just paid a dividend of ?$1.38 ?(i.e., D0? = ?$1.38?). Such dividend is expected to grow by 45?% per year for the next 3? years, after which it is expected to grow at a? long-run rate of 4.5?%. Assuming investors require a 12?% return on the? stock, ?a) What is the price at? t=3? ?$*** ?(to the nearest? cent) ?b) What is its price? today???? $***(to the nearest? cent) ?c) What is your total rate of return? (% to two? decimals) if in one year the price is ?$45.71 and the dividend is ?$2.12?? *** % What is your dividend? yield? ***?%?? What is your capital gain? (loss) yield?***% *** answers
Explanation / Answer
a) Computation of market price at the end of year 3 using Gordon Growth Mdel
P3 = D4 / (Ke-g)
where,
P3 - Market price at the end of year 3
D4 - Expected dividend in year 4
Ke - rate of return
g - growth rate
P3 = D4 / (Ke-g)
= (1.38*1.45*1.45*1.45*1.045) / (.12 - .045)
= 4.3964 / .075
= $58.62
b) Computing current share price by discounting the cashflow at required return
current share price = $48.83 (1.79+2.31+44.73)
*PVF = 1 / (1+r)n
c) Computation of total rate of return
(Price in year 1 - Price in year 0 + Dividend in year 1) / Price in year 0
(45.71-48.83+2.12) / 48.83
-2.05%
d) Dividend Yield
Dividend in year 1) / Price in year 0
2.12 / 48.83
4.34%
e) Capital loss Yield
(Price in year 1 - Price in year 0) / Price in year 0
(45.71-48.83) / 48.83
-6.39%
Year Dividend PVF@12%* Present Value (Cashflow*PVF) 1 2.001 0.893 1.79 2 2.9015 0.797 2.31 3 62.8271(4.2071+58.62) 0.712 44.73Related Questions
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