The document contains 10 stock valuation problems involving concepts like dividend yield, capital gains yield, constant growth dividend discount model, and required rate of return. The problems require calculating prices per share, dividend growth rates, and required rates of return given information about current and expected future dividends, stock prices, and required rates of return.
The document contains 10 stock valuation problems involving concepts like dividend yield, capital gains yield, constant growth dividend discount model, and required rate of return. The problems require calculating prices per share, dividend growth rates, and required rates of return given information about current and expected future dividends, stock prices, and required rates of return.
The document contains 10 stock valuation problems involving concepts like dividend yield, capital gains yield, constant growth dividend discount model, and required rate of return. The problems require calculating prices per share, dividend growth rates, and required rates of return given information about current and expected future dividends, stock prices, and required rates of return.
The document contains 10 stock valuation problems involving concepts like dividend yield, capital gains yield, constant growth dividend discount model, and required rate of return. The problems require calculating prices per share, dividend growth rates, and required rates of return given information about current and expected future dividends, stock prices, and required rates of return.
Download as DOCX, PDF, TXT or read online from Scribd
Download as docx, pdf, or txt
You are on page 1/ 3
Stock Valuation
1. If current price of stock is $25 and you hold it for one year and received dividend of $2.5. You sold it at $27. How much return you received? Show dividend yield and capital gain separately. Answer: Return= (End Value-Beginning value+ Dividend)/Beginning value = (27-25+2.5)/25 =18% Dividend yield=Dividend/Beginning value = (2.5/25) =10% Capital gains= (End Value-Beginning value)/Beginning value = (27-25)/25 =8%
2. If investor required return is 20% and capital gain is 8% how much dividend company should pay?
Answer: Required gain=capital gain yield+ dividend yield Dividend yield=20%-8%=12.00%
3. Current price of stock is $20 and expected price after one year is 22.5. If investor required return is 18%. What percentage of dividend should company pay? Answer: Capital gains yield=22.5/20-1=12.50% Dividend yield=required return-capital gains yield=18%-12.5%=5.50
4. You own a stock that will start paying $0.50 annually at the end of the year. It has zero growth in future. If the required rate of return is 14%, what should you pay per share? Answer: Price per share per DDM [Constant dividend formula] = 0.50/14% = $ 3.57
5. You own a stock that will start paying $0.50 annually at the end of the year. It will then grow each year at a constant annual rate of 5%. If the required rate of return is 14%, what should you pay per share? Answer:
Price per share per DDM [Constant growth
formula] = 0.50/ (14%-5%) = $ 5.56 6. What should you pay for a stock assuming you expect the following: a dividend of $1.00 paid at the end of years 1 and 2; cost of equity equal to 8 percent; and, a selling price of $31 at the end of two years?
ANSWER: Price = the sum of the discounted cash flows in Yr 1 you get the dividend in Yr 2 you get the dividend and the sale price P0 = $1/1.08 + $1/1.08^2 + $31/1.08^2 = 1/1.08 + 32/1.08^2 = $28.36
7. Assume that IBM is expected to pay a total cash dividend of $5.60 next year and that dividends are expected to grow at a rate of 5% per year forever. Assuming annual dividend payments, what is the current market value of a share of IBM stock if the required return on IBM common stock is 10%? Answer: (e.g., $5.60 at t = 1), g is the growth rate in dividends per year forever (where g = 5%), and r is the required rate of return on stock (where r = 0.1). We have: P0= $5.60 / (0.10 – 0.05) = $112. 00..]
8. Consider the following for a firm. Its stock price (P 0) is at $50, its payout ratio (POR) is 0.4, its EPS1 is $2.00, and its expected return on the money retained (i) is 0.10. What is investor’s required rate of return? Answer:
9. You own a stock that is currently selling for $50. You expect a dividend of $1.50 next year and you require a 12% rate of return. What is the dividend growth rate for your stock assuming constant growth? Answer: We can rearrange the equation for the dividend valuation model with constant growth to solve for the dividend growth rate (g). Doing this, we have: g= r− 0DPwhere ris the required rate of return and 0DPis the dividend yield. (NOTE. The growth rate, g, is the capital gains yield and is often called the price appreciation.) Inserting the given values, we have: g0.12 − $1.50$50= 0.12 − 0.03 = 9.00%
10. What would you pay for a stock expected to pay a $2.50 dividend in one year if the expected dividend growth rate is zero and you require a 10% return on your investment? 11. What would you pay for a stock expected to pay a $2.25 dividend in one year if the expected dividend growth rate is 3% and you require a 12% return on your investment?
