Burgerama Inc. stock is currently trading at $12 per share and the company paid
ID: 2712171 • Letter: B
Question
Burgerama Inc. stock is currently trading at $12 per share and the company paid a dividend of $0.50 last year.
a) If the stock price is expected to increase by 6% and the dividend is expected to increase by 3%, what is the expected return for shareholders?
b) You want to find out the projected dividends for the next few years before buying any shares of this stock. During the next 3 years, dividends will grow 3% and then grow at 9% the following year with an 11% constant growth every year thereafter. The required rate of return is 12%. What is today's value of Burgerama Inc.'s stock?
Explanation / Answer
a. Current trading price 12 Expected price 12*1.06 12.72 Current dividend 0.5 Expected dividend 0.5*1.03 0.515 Expected Return to shareholders Dividend/Price=0.515/12.72 0.040487 4.05% Discounting of Future cash flows Year Calculation Cash flow PV F @ 12% PV @ 12% D0 0.515 D1 0.515*1.03^1 0.53045 0.89286 0.4736176 D2 0.515*1.03^2 0.546364 0.79719 0.4355555 D3 0.515*1.03^3 0.562754 0.71178 0.4005573 D4 0.562754*1.09 0.613402 0.63552 0.3898292 Next yr's dividend(D5) 0.613402*1.11 PV of future Cash flows- Nextyr. Dividend/(Reqd.return- Growth rate)@ Year 4 D4 0.613402*1.11/(0.12-0.11) 68.08762 0.63552 43.271046 Total PV of future Cash flows from owning the stock 44.970605 Today's value of Burgerama Inc.'s stock = $ 44.97
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