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# Foundations of Finance - DDM, Growth rate

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1. Stock. What is the value of a stock with a

a. \$2 dividend just paid and an 8% required return with 0% growth?
b. \$3 dividend just paid and a 9% required return with 1% growth?
c. \$4 dividend to be paid and a 10% required return with 2% growth?
d. \$5 dividend to be paid and a 11% required return with 3% growth?

2. Stock. What is the required rate of return on a stock with a

a. \$1.5 expected dividend and a \$19 price with 7% growth?
b. \$1.75 expected dividend and a \$25 price with 8% growth?
c. \$2 expected dividend and a \$26 price with 9% growth?
d. \$2.25 expected dividend and a \$33 price with 10% growth?

3. Stock. What is the growth rate of the stock with a

a. \$2.50 expected dividend and a \$30.60 price with 15% required return?
b. \$2 expected dividend and a \$25.35 price with 12% required return?
c. \$3 expected dividend and a \$10.40 price with 11% required return?
d. \$1.77 expected dividend and a \$50.20 price with 14% required return?

4. Stock price. What is the value of a stock with high growth then constant growth,

a. dividends of \$1.50, \$3.00, and \$6.00, constant growth at 4% and a required return of 6%?
b. dividends of \$2.50, \$3.50, and \$5.00, constant growth at 3.5% and a required return of 8%?
c. dividends of \$1.50, \$3.00, and \$6.00, constant growth at 5% and a required return of 10%?
d. dividends of \$2.50, \$3.50, and \$5.00, constant growth at 7% and a required return of 12%?

\$2.19
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## Using CAPM and CGM, Calculation XYZ's Stock Price

See the attached file.

Scenario:

By walking through a set of financial data for XYZ, this assignment will help you better understand how theoretical stock prices are calculated and how prices may react to market forces such as risk and interest rates. You will use both the CAPM (capital asset pricing model) and the constant growth model (CGM) to arrive at XYZ's stock price.

Find an estimate of the risk-free rate of interest (krf). To obtain this value, go to Bloomberg.com: Market Data and use the "U.S. 10-year Treasury" bond rate (middle column) as the risk-free rate. In addition, you also need a value for the market risk premium. Use an assumed market risk premium of 7.5%.

Using the information from the XYZ Stock Information document, record the following values:
XYZ's beta (Ã?)
XYZ's current annual dividend
XYZ's 3-year dividend growth rate (g)
Industry P/E
XYZ's EPS

With the information you recorded, use the CAPM to calculate XYZ's required rate of return (ks).

Use the CGM to find the current stock price for XYZ. We will call this the theoretical price (Po).

Now use appropriate Web resources to find XYZ's current stock quote (P). Compare Po and P and answer the following questions:
Are there any differences?
What factors may be at work for such a difference in the two prices?

Now assume the market risk premium has increased from 7.5% to 10% and this increase is due only to the increased risk in the market. In other words, assume the krf and the stock's beta remain the same for this exercise.
What will the new price be? Explain.

Recalculate XYZ's stock price using the P/E ratio model and the needed info found in the XYZ Stock Information file.
Why is the present stock price different from the price arrived at using CGM (Constant Growth Model)?

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