Beby Donat
Dr. Anna Pomeranets
FIN 3403
06/28/2021
Ch 8 #1 Stock Values
The Jackson- Timberlake Wardrobe Co. just paid a dividend of $1.15 per share on its stock. The
dividends are expected to grow at a constant rate of 7 percent per year indefinitely. Investors
require a return of 12 percent on the company'’s stock.
a) What is the current stock price?
b) What will the stock price be in 3 years?
C ) What will the stock price be in 12 years?
A ) PI = D(I+g) / [ R - g]
PV = 1.15. (1+07) / [12 - 7]
PV = 1.15 . (1.07) / [12 - 7]
PV = ? $ 24.61
B)
PV = $24.61
I/Y=7
N=3
FV = ? $30.15
C)
PV = $24.61
N = 12
I=7
FV = ? $55.42
Ch 8 #2 Stock Values
The next dividend payment by Savitz, Inc., will be $1.84 per share. The dividends are
anticipated to maintain a growth rate of 5 percent forever. If the stock currently sells for $36 per
share, what is the required return?
Required Rate of Return Formula
Rs = [(Next Dividend ($) / Current Stock Price ($) + (g) ]
Rs = [(1.84 / 36.00) . (100)] + (5%)]
Rs = 5.11% + 5%
Rs = 10.11
Ch 8 #3 Stock Values
The next dividend payment by Savitz, Inc., will be $1.52 per share. The dividends are
anticipated to maintain a growth rate of 6 percent forever. The stock currently sells for $28 per
share.
A ) What is the dividend yield?
B ) What is the capital gain percentage?
A)
DI = [ (1.52 / 28.00) . (100) ]
DI = ? (5.43%)
B)
g = growth rate
(6%)
Ch 8 #4 Stock Values
Wilson Corporation will pay a dividend of $3.22 per share next year. The company
pledges to increase its dividend by 6 percent per year indefinitely. If you required a
return of 11 percent on your investment, how much will you pay for the company'’s stock
today?
DI = $3.22
g = 6%
Rs = 11%
P0 = ? 64.40
P0 = DI / (R - g)
P0 = 3.22 / 0.11 - 0.06
P0 = 64.40
Ch 8 # 5 Stock Valuation
Grateful height Co. is expected to maintain a constant 5 percent growth rate in its
dividends indefinitely. If the company has a dividend yield of 6.8 percent, what is the
required return of the company'’s stock?
g = 5%
DI = 6.8%
R = ? 11.80
Required Rate of Return = g + DI
R = 5% + 6.8% = 11.80
Ch 8 # 6 Valuing Preferred Stock
Bedeker, Inc., has an issue of preferred stock outstanding that pays a $4.55 dividend
every year in perpetuity. If this issue currently sells for $96 per share, what is the
required return?
Dividend = $4.55
Stock price = $96
Rs = ? 4.74%
Required rate of return = (dividend / market price) . 100
R = ( 4.55 / 96) . 100
Rs = 4.74%
Ch 8 # 7 Stock Valuation and Preferred Return
Red, IncYellow Corp. and Blue Company each will pay a dividend of $2.80 next year.
The growth rate in dividend for all three companies is 4 percent. The required return for
each company stock is 8 percent, 11 percent and 14 percent respectively. What is the
stock price for each company?
DI = $2.80
g = 4%
R0 = 8%
R1 = 11%
R2 = 14
P0 =? 0.7 = $70.00
P1 =? 0.4 = $40.00
P2 =? 0.28 = $28.00
P0 = DI / (R - g)
P0 = 2.80 / (8 - 4)
P0 = 2.80 / 4 = 0.7 = 70.00
P1 = DI / (R - g)
P1 = 2.80 / (11 - 4 )
P1 = 2.80 / 7
P1 = 0.4 = $40.00
P2 = DI / (R - g)
P2 = 2.80 / (14 - 4)
P2 = 2.80 /10
P2 = 0.28 = $28.00
Ch 8
# 8 Stock Valuation and PE
The Perfect Rose Co. has earnings of $2.25 per share. The benchmark PE for the
company is 15.
a) What stock price would you consider appropriate?
b) What if the benchmark PE were 18?
a)
E = $2.25
PE = 15
P =? $33.75
P = Benchmark PE ratio . Earnings
P = 15 . 2.25
P = $33.75
b)
E = $2.25
PE1 = 18?
P1 =? $40.50
P1 = Benchmark PE ratio . Earnings
P1 = 18 . 2.25
P1 = 18 . 2.25 = $40.50
Ch 8 # 9
Non Constant Growth
Metallica Bearings, Inc., is a young start up company. No dividends will be paid on the
stock over the nine years because the firm needs to plow back its earnings to fuel
growth. The company will pay a dividend of $18 per share 10 years from today and will
increase the dividend by 6 percent per year thereafter. If the required return on this
stock is 13, what is the current share price?
/0.035.5 $257.14
D = $18
g = 6%
R = 13
PO =?
Pt = [Dt . (1 + g)] / (R - g)
This mean that since we will use the dividend in year 10, we will be finding the stock
price in year 9. The dividend growth model is similar to the present value of an annuity
and the present value of a perpetuity. The equation gives me the present value one
period before the first payment. So, the price of the stock n year 9 will be:
P9 = D10 / (R - g)
P9 = $18.00 / ( 0.13 - 0.06) = $257.14
The price of the stock today is simply the PV of the stock price in the future. We simply
discount the future stock price at the required return. The price of the stock today will
be:
PO = $257.14 / (1.13)>9
PO =