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    Class Discussion 06 - Stocks

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    Sharmila Bala
    The document discusses stock valuation and discusses 11 examples calculating stock prices and dividend growth rates using various valuation models like the dividend growth model and P/E ratio. Information provided includes dividend amounts, growth rates, required rates of return, and other financial metrics to calculate current and future stock prices.

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    © All Rights Reserved
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    Class Discussion 06 - Stocks

    Uploaded by

    Sharmila Bala
    7 views2 pages
    The document discusses stock valuation and discusses 11 examples calculating stock prices and dividend growth rates using various valuation models like the dividend growth model and P/E ratio. Information provided includes dividend amounts, growth rates, required rates of return, and other financial metrics to calculate current and future stock prices.

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    Class discussion 06_Stocks

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    The document discusses stock valuation and discusses 11 examples calculating stock prices and dividend growth rates using various valuation models like the dividend growth model and P/E ratio. Information provided includes dividend amounts, growth rates, required rates of return, and other financial metrics to calculate current and future stock prices.

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    7 views2 pages

    Class Discussion 06 - Stocks

    Uploaded by

    Sharmila Bala
    The document discusses stock valuation and discusses 11 examples calculating stock prices and dividend growth rates using various valuation models like the dividend growth model and P/E ratio. Information provided includes dividend amounts, growth rates, required rates of return, and other financial metrics to calculate current and future stock prices.

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    of 2

    Class Discussion – Stocks

    1. A firm just paid a dividend of $1.00 per share. The dividend is expected to grow 40% a year for
    the next two years and then at 5% per year thereafter. What is the expected dividend per share
    for each of the next four years?

    2. A firm currently pays a $0.50 annual cash dividend. It plans to maintain the dividend at this level
    for the foreseeable future as no future growth is anticipated. If the required rate of return by
    common stockholders is 11 percent, what is the price of the common stock?

    3. A company is expected to pay a $0.30 per share dividend at the end of the year. The dividend is
    expected to grow at a constant rate of 4.0% per year. What is the stock value per share if the
    required rate of return is 12.0% ?

    4. A company just paid a $0.50 per share dividend. The dividend is expected to grow at a constant
    rate of 5% per year. The required rate of return is 13.5%. What is the stock value per share?

    5. A firm’s common stock is currently selling for $7.50 per share. The required rate of return is
    13.9% and the company will pay an annual dividend of $0.63 per share one year from now
    which will grow at a constant rate for the next several years. What is the growth rate?

    6. A firm pays a RM1.60 dividend at the end of year one, has a stock price of RM32.00 and a
    constant growth rate of 5.5 percent. Estimate the expected rate of return.

    7. Company XYZ just paid a dividend of $1.40 per share. The dividend is expected to grow at a
    constant rate of 6% per year. The stock currently sells for $20 per share. What is the required
    rate of return? What stock price is expected 1 year from now?

    8. You plan to invest in the stock of Firm Q. The dividend on its stock will be $0.55 in 1 year, $0.60
    in 2 years, and $0.90 in 3 years. You expect to sell the stock for $12.00 after 3 years. If you
    require a 10% return on this investment, how much would you be willing to pay for a share of
    this stock today?

    9. Tech Ltd’s latest reported net income is $12.50 million. It has a total number of 15,500,000
    shares outstanding. Listed companies similar to Tech Ltd. have an average trailing price-to-
    earnings ratio of 12 times. Calculate the stock worth today using the price-to-earnings method.

    10. A company is expected to grow fast at 50% per year for the next two years, and then to decline
    to a constant growth rate of 6%. If the most recent dividend paid is RM2 and required rate of
    return is 12%, what is its stock worth today?

    11. Number of ordinary shares = 5 million


    Total shareholders’ equity = $64 million
    Last year’s net profit = $8 million
    Dividend payout ratio = 70%
    Beta of the firm’s equity = 0.80
    Risk-free rate = 3.5%
    Average market return = 13.0%
    Average sector price/earnings ratio = 14

    Based on the above information of a firm, estimate the fair price of its common stock using
    (i) dividend growth model
    (ii) P/E ratio

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