1. Stock. What is the value of a stock with a a. $2 dividend just paid and an 8%
ID: 2662569 • Letter: 1
Question
1. Stock. What is the value of a stock with a
a. $2 dividend just paid and an 8% required return with 0%growth?
b. $3 dividend just paid and a 9% required return with 1%growth?
c. $4 dividend to be paid and a 10% required return with 2%growth?
d. $5 dividend to be paid and a 11% required return with 3%growth?
2. Stock. What is the required rate of return on a stock witha
a. $1.5 expected dividend and a $19 price with 7% growth?
b. $1.75 expected dividend and a $25 price with 8% growth?
c. $2 expected dividend and a $26 price with 9% growth?
d. $2.25 expected dividend and a $33 price with 10% growth?
3. Stock. What is the growth rate of the stock with a
a. $2.50 expected dividend and a $30.60 price with 15% requiredreturn?
b. $2 expected dividend and a $25.35 price with 12% requiredreturn?
c. $3 expected dividend and a $10.40 price with 11% requiredreturn?
d. $1.77 expected dividend and a $50.20 price with 14% requiredreturn?
4. Stock price. What is the value of a stock with high growththen constant growth,
a. dividends of $1.50, $3.00, and $6.00, constant growth at 4%and a required return of 6%?
b. dividends of $2.50, $3.50, and $5.00, constant growth at 3.5%and a required return of 8%?
c. dividends of $1.50, $3.00, and $6.00, constant growth at 5%and a required return of 10%?
d. dividends of $2.50, $3.50, and $5.00, constant growth at 7%and a required return of 12%?
1. Stock. What is the value of a stock with a
a. $2 dividend just paid and an 8% required return with 0%growth?
b. $3 dividend just paid and a 9% required return with 1%growth?
c. $4 dividend to be paid and a 10% required return with 2%growth?
d. $5 dividend to be paid and a 11% required return with 3%growth?
2. Stock. What is the required rate of return on a stock witha
a. $1.5 expected dividend and a $19 price with 7% growth?
b. $1.75 expected dividend and a $25 price with 8% growth?
c. $2 expected dividend and a $26 price with 9% growth?
d. $2.25 expected dividend and a $33 price with 10% growth?
3. Stock. What is the growth rate of the stock with a
a. $2.50 expected dividend and a $30.60 price with 15% requiredreturn?
b. $2 expected dividend and a $25.35 price with 12% requiredreturn?
c. $3 expected dividend and a $10.40 price with 11% requiredreturn?
d. $1.77 expected dividend and a $50.20 price with 14% requiredreturn?
4. Stock price. What is the value of a stock with high growththen constant growth,
a. dividends of $1.50, $3.00, and $6.00, constant growth at 4%and a required return of 6%?
b. dividends of $2.50, $3.50, and $5.00, constant growth at 3.5%and a required return of 8%?
c. dividends of $1.50, $3.00, and $6.00, constant growth at 5%and a required return of 10%?
d. dividends of $2.50, $3.50, and $5.00, constant growth at 7%and a required return of 12%?
Explanation / Answer
1. Stock. What is the value of a stock with a a. $2 dividend just paid and an 8% required return with 0%growth? Here D0= $2, g=growth rate = 0%, Reqd return = Ks= 8% We know the using Dividend discounting model, value of stockis P0=D1/(Ks-g) = Do(1+g)/(Ks-g) ie Value of stock = 2*(1+0%)/(8% - 0%) = 2*1/0.08 = $25b. $3 dividend just paid and a 9% required return with 1%growth? Here D0= $3, g=growth rate = 1%, Reqd return = Ks= 9% We know the using Dividend discounting model, value of stockis P0=D1/(Ks-g) = Do(1+g)/(Ks-g) ie Value of stock = 3*(1+1%)/(9% - 1%) = 3*1.01/0.08 =$37.88
c. $4 dividend to be paid and a 10% required return with 2%growth? Here D1= $4 as Dividend will be paid, g=growth rate = 2%, Reqdreturn = Ks= 10% We know the using Dividend discounting model, value of stockis P0=D1/(Ks-g) ie Value of stock = 4/(10% - 2%) = 4/0.08 = $50.00
d. $5 dividend to be paid and a 11% required return with 3%growth? Here D1= $5 as Dividend will be paid, g=growth rate = 3%, Reqdreturn = Ks= 11% We know the using Dividend discounting model, value of stockis P0=D1/(Ks-g) ie Value of stock = 5/(11% - 3%) = 5/0.08 = $62.50
2. Stock. What is the required rate of return on a stock witha a. $1.5 expected dividend and a $19 price with 7%growth? Here D1= $1.5 as Dividend is expected to be paid, g=growthrate = 7% =0.07, Reqd return = Ks= ?? We know the using Dividend discounting model, value of stockis P0=D1/(Ks-g) Solving for Ks, we get Ks = D1/P0 + g = 1.5/19 + 0.07 = 0.15 =15%
b. $1.75 expected dividend and a $25 price with 8%growth? Here D1= $1.75 as Dividend is expected to be paid, g=growthrate = 8% =0.08, Reqd return = Ks= ?? We know the using Dividend discounting model, value of stockis P0=D1/(Ks-g) Solving for Ks, we get Ks = D1/P0 + g = 1.75/25 + 0.08 = 0.15= 15%
c. $2 expected dividend and a $26 price with 9% growth? Here D1= $2 as Dividend is expected to be paid, g=growth rate= 9% =0.09, Reqd return = Ks= ?? We know the using Dividend discounting model, value of stockis P0=D1/(Ks-g) Solving for Ks, we get Ks = D1/P0 + g = 2/26 + 0.09 = 0.17 =17%
d. $2.25 expected dividend and a $33 price with 10%growth? Here D1= $2.25 as Dividend is expected to be paid, g=growthrate = 10% =0.10, Reqd return = Ks= ?? We know the using Dividend discounting model, value of stockis P0=D1/(Ks-g) Solving for Ks, we get Ks = D1/P0 + g = 2.25/33 + 0.10 = 0.17= 17%
3. Stock. What is the growth rate of the stock with a a. $2.50 expected dividend and a $30.60 price with 15%required return? Here D1= $2.50 as Dividend is expected to be paid, g=growthrate = ???, Reqd return = Ks= 15% = 0.15 We know the using Dividend discounting model, value of stockis P0=D1/(Ks-g) Solving for g, we get g = Ks - D1/P0 = 0.15 - 2.50/30.60 =0.07 = 7%
b. $2 expected dividend and a $25.35 price with 12% requiredreturn? Here D1= $2 as Dividend is expected to be paid, g=growth rate= ???, Reqd return = Ks= 12% = 0.12 We know the using Dividend discounting model, value of stockis P0=D1/(Ks-g) Solving for g, we get g = Ks - D1/P0 = 0.12 - 2/25.35 = 0.04 =4%
c. $3 expected dividend and a $10.40 price with 11% requiredreturn? Here D1= $3 as Dividend is expected to be paid, g=growth rate= ???, Reqd return = Ks= 11% = 0.11 We know the using Dividend discounting model, value of stockis P0=D1/(Ks-g) Solving for g, we get g = Ks - D1/P0 = 0.11 - 3/10.40 = -0.18= -18%. Thus Stock has a negative growth.
d. $1.77 expected dividend and a $50.20 price with 14%required return? Here D1= $1.77 as Dividend is expected to be paid, g=growthrate = ???, Reqd return = Ks= 14% = 0.14 We know the using Dividend discounting model, value of stockis P0=D1/(Ks-g) Solving for g, we get g = Ks - D1/P0 = 0.14 - 1.77/50.20 =0.10 = 10%
4. Stock price. What is the value of a stock with high growththen constant growth,
To implement the model wherein there is a Non-constant growthfollowed by constant growth, the following three steps shouldbe
followed: A. Find the PV of the dividends during the period ofnonconstant growth. B. Find the price of the stock at the end of the nonconstantgrowth period,at which point it has become a constant growth stock,and
discount thisprice back to the present. C. Add these two components to find the intrinsic value of thestock, P0.
ie P0 = D1/(1 + ks)^1 + D2/(1 + ks)^2 + D3/(1 + ks)^3 +[D4/(ks -g)]/(1 + ks)^3 ie P0 = D1/(1 + ks)^1 + D2/(1 + ks)^2 + D3/(1 + ks)^3 +[D3(1+g)/(ks -g)]/(1 + ks)^3 as Non-constant rate of growth is Not given, we will assumethat given Dividends are D1, D2 & D3
Uisng the above, we get a. dividends of $1.50, $3.00, and $6.00, constant growth at 4%and a required return of 6%? ie P0 = D1/(1 + ks)^1 + D2/(1 + ks)^2 + D3/(1 + ks)^3 +[D3(1+g)/(ks -g)]/(1 + ks)^3 ie P0 = 1.50/(1+6%)^1 + 3/(1+6%)^2 + 6/(1+6%)^3 +[6*(1+4%)/(6%-4%)]/(1+6%)^3 ie P0 = 271.08
b. dividends of $2.50, $3.50, and $5.00, constant growth at3.5% and a required return of 8%? ie P0 = D1/(1 + ks)^1 + D2/(1 + ks)^2 + D3/(1 + ks)^3 +[D3(1+g)/(ks -g)]/(1 + ks)^3 ie P0 = 2.50/(1+8%)^1 + 3.5/(1+8%)^2 + 5/(1+8%)^3 +[5*(1+3.5%)/(8%-3.5%)]/(1+8%)^3 ie P0 = 100.58
c. dividends of $1.50, $3.00, and $6.00, constant growth at 5%and a required return of 10%? ie P0 = D1/(1 + ks)^1 + D2/(1 + ks)^2 + D3/(1 + ks)^3 +[D3(1+g)/(ks -g)]/(1 + ks)^3 ie P0 = 1.50/(1+10%)^1 + 3/(1+10%)^2 + 6/(1+10%)^3 +[6*(1+5%)/(10%-5%)]/(1+10%)^3 ie P0 = 103.02
d. dividends of $2.50, $3.50, and $5.00, constant growth at 7%and a required return of 12%? ie P0 = D1/(1 + ks)^1 + D2/(1 + ks)^2 + D3/(1 + ks)^3 +[D3(1+g)/(ks -g)]/(1 + ks)^3 ie P0 = 2.50/(1+12%)^1 + 3.5/(1+12%)^2 + 5/(1+12%)^3 +[5*(1+7%)/(12%-7%)]/(1+12%)^3 ie P0 = 84.74
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