11. (TCO D) Company XYZ is expected to grow at 15% annually forever, and its div

Question

11. (TCO D) Company XYZ is expected to grow at 15% annually forever, and its dividend in the next 12 months is expected to be $1.50, and its required rate of return is 19.5%.
a. What is its intrinsic value?
b. If the current price is equal to its intrinsic value, what is next year's expected price?
c. Assume you buy the stock now and sell it after receiving the $1.50 dividend one year from now. What would be your anticipated capital gain in percentage terms?
What is the dividend yield and the holding period return?
(Points : 34)

Explanation / Answer

11. (TCO D) Company XYZ is expected to grow at 15% annually forever, and its dividend in the next 12 months is expected to be $1.50, and its required rate of return is 19.5%.
a. What is its intrinsic value?

intrinsic value = D1/(re-g)

intrinsic value = 1.50/(0.195-0.15)

Intrinsic value = $ 33.33

b. If the current price is equal to its intrinsic value, what is next year's expected price?

Next year's expected price = 33.33*1.15

Next year's expected price = $ 38.33

c. Assume you buy the stock now and sell it after receiving the $1.50 dividend one year from now. What would be your anticipated capital gain in percentage terms?
What is the dividend yield and the holding period return?

Anticipated capital gain in percentage terms = (38.33-33.33)/33.33 = 15%

Dividend yield = 1.50/33.33 = 4.50%

Holding Period return = (1.50 + (38.33-33.33))/33.33 = 19.50%

Related Questions

Navigate

• Browse (All)
• Browse 1
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.