Evaluate dividends
Not what you're looking for?
1) A stock you are evaluating just paid an annual dividend of $2.50. Dividends have grown at a constant rate of 1.5% over the last 15 years and you expect this to continue.
a. If the required rate of return on the stock is 12% what is its fair present market value?
b. If the requested rate of return on the stock is 15% what is its expected price four years from today?
2) You are considering the purchase of a stock that is currently selling at $64 per share. You expect the stock to pay $4.50 in dividends next year.
a) If the dividend are expected to grow at a constant rate of 3% per year what is your expected rate of return on this stock?
b) If the dividend are expected to grow at a constant rate of 5% per year what is your expected rate of return on this stock?
c) What do your answers in parts a and b tell you about the impact of dividend growth rates on expected rate of returns?
3) A stock that you are evaluating is expected to experience supernormal growth In dividends of 8% over the next six years. Following this period, dividends are expected to grow at a constant rate of 3. The stock paid a dividend of $5.50 last year and the required rate of return on the stock is 10%. Calculate the stocks fair present market value.
Purchase this Solution
Solution Summary
Evaluate dividends: required rate of return, expected growth rate, present market value
Solution Preview
We use the ddm to value the stocks in all three questions. The ddm says that price = dividend/(required return - growth rate).
1.
a) price = 2.5/(0.12-0.015) = 23.81
b) In 4 years from today, the dividend will be 2.5 X 1.015^4 = 2.65.
So, by ddm, it will be worth 2.65/(0.15 - 0.015) = 19.63. This value is expressed in the money 4 years from today.
To see how much it will be worth in present terms, we discount it 19.63/1.15^4 = 11.22.
So the stocks price in 4 year from ...
Purchase this Solution
Free BrainMass Quizzes
Transformational Leadership
This quiz covers the topic of transformational leadership. Specifically, this quiz covers the theories proposed by James MacGregor Burns and Bernard Bass. Students familiar with transformational leadership should easily be able to answer the questions detailed below.
Organizational Leadership Quiz
This quiz prepares a person to do well when it comes to studying organizational leadership in their studies.
Organizational Behavior (OB)
The organizational behavior (OB) quiz will help you better understand organizational behavior through the lens of managers including workforce diversity.
Social Media: Pinterest
This quiz introduces basic concepts of Pinterest social media
MS Word 2010-Tricky Features
These questions are based on features of the previous word versions that were easy to figure out, but now seem more hidden to me.