The common stock of Connor, Inc., is selling for $40 a share and has a dividend yield
of 2 percent. What is the dividend amount?
80/40 = 2%
.02(40) = 0.8
If D1 = $4.5, g (which is constant) = 6.4%, and P0 = $60.6, what is the stock’s
expected total return for the coming year?
4.5/ 60.6+ 6.14= 6.47
Gordon Growth formula (aka Dividend Growth model) can be used to find the stock
price, given the required return and the dividend growth rate. It’s used to value stocks
based on the present values of future dividends. The dividend growth rate must be
constant for this formula to work!
I set up most of problems for you so that you should be okay with solving the rest of it. If
you have any questions feel free to let me know.
D1/(r-g) = Price
4.5/(r-.064) = 60.6
Solve for r
ABC Inc., is expected to pay an annual dividend of $0.8 per share next year. The
required return is 14.2 percent and the growth rate is 6.7 percent. What is the expected
value of this stock five years from now?
NPER 5, Rate 6.7, PV 10.67 which I got from doing .8/(.142-.067), PMT 0, FV 14.76
D1 = 0.8
r = .142
g = .067
D1*(1+g)^5 =D6
D6/(r-g) = StockPricein5Years
ABC Company's last dividend was $0.7. The dividend growth rate is expected to be
constant at 24% for 2 years, after which dividends are expected to grow at a rate of
7% forever. The firm's required return (rs) is 11%. What is its current stock price (i.e.
solve for Po)?
25.23 this is one we worked yesterday
ABC's stock has a required rate of return of 18.4%, and it sells for $69 per share. The
dividend is expected to grow at a constant rate of 6.2% per year. What is the expected
year-end dividend, D1?
8.41 one we did yesterday
If last dividend = $4.1, g = 8.2%, and P0 = $67.4, what is the stock’s expected total
return for the coming year?
4.1/ 67.4 + 8.2= 8.26
4.1(1+.082)/(r-.082) = 67.4
Solve for r
The common stock of Wetmore Industries is valued at $74.6 a share. The company
increases their dividend by 4.3 percent annually and expects their next dividend to be
$0.5. What is the required rate of return on this stock?
4.3/74.6= 5.76
74.6=0.5*(1+.043)/(r-.043)
ABC is expected to pay a dividend of $1.4 per share at the end of the year. The stock
sells for $109 per share, and its required rate of return is 18.3%. The dividend is
expected to grow at some constant rate, g, forever. What is the growth rate (i.e. solve
for g)?
17.01 one we did yesterday
A stock just paid a dividend of $0.6. The required rate of return is 11%, and the
constant growth rate is 3.9%. What is the current stock price?
.6/(.11-.039)= 8.45
Price = 0.6*(1+.039)/(.11-.039)
ABC Enterprises' stock is expected to pay a dividend of $2 per share. The dividend is
projected to increase at a constant rate of 3.7% per year. The required rate of return
on the stock is 14.5%. What is the stock's expected price 3 years from today (i.e.
solve for P3)?
2.74/(.145-.037)= 28.29
D1 = 2
r = .145
g = .037
D1*(1+g)^3 =D4
D4/(r-g) = StockPricein3Years
ABC's last dividend was $5.2. The dividend growth rate is expected to be constant at
31% for 3 years, after which dividends are expected to grow at a rate of 5%
forever. If the firm's required return (rs) is 14%, what is its current stock price (i.e.
solve for Po)?
112. 79 one we did yesterday
ABC’s last dividend paid was $2, its required return is 17.9%, its growth rate is 5.5%, and its
growth rate is expected to be constant in the future. What is Sorenson's expected stock price in 7
years, i.e., what is P7?
NPER 7, Rate 5.5, PV- 16.13, PMT 0, FV 23.46
D0 = 2
r = .179
g = .055
D0*(1+g)^8 =D8
D8/(r-g) = StockPricein7Years
ABC Enterprises' stock is currently selling for $35.9 per share. The dividend is
projected to increase at a constant rate of 6.6% per year. The required rate of return
on the stock is 12%. What is the stock's expected price 5 years from today (i.e. solve
for P5)?
NPER 5, Rate 6.6, PV 35.9, PMT 0, FV 49.42
Price = 35.9
r = .12
g = .066
Find D0: _____
D0*(1+g)^6 =D6
D6/(r-g) = StockPricein5Years
ABC just paid a dividend of D0 = $1.6. Analysts expect the company's dividend to
grow by 34% this year, by 21% in Year 2, and at a constant rate of 6% in Year 3 and
thereafter. The required return on this stock is 17%. What is the best estimate of the
stock’s current market value?
21.98 this is one we did yesterday
A stock's next dividend is expected to be $0.7. The required rate of return on stock
is 16.8%, and the expected constant growth rate is 7%. What is the stock's current
price?
.07/(.168-.07)= 7.14
Great!
A stock is expected to pay a dividend of $1.3 at the end of the year. The required rate of return is
rs = 16.3%, and the expected constant growth rate is g = 6.9%. What is the stock's current price?
1.3/(.163-.069)= 13.83
Perfect.
If D1 = $3.57, g (which is constant) = 2%, and P0 = $91.63, what is the stock’s
expected dividend yield for the coming year?
3.57/91.63= .038961 and I’m not sure how to round it to two decimals correctly.
Rounded is 0.04, but it’s the right idea.
A stock just paid a dividend of D0 = $1.9. The required rate of return is rs = 10.1%,
and the constant growth rate is g = 6.5%. What is the current stock price?
1.9(1+.065)/( .101-.065)= 52.78
You have to multiply by (1+g) because they give you D0, the dividend right now, not D1.