Explore BrainMass
Share

# Return on stocks

This content was COPIED from BrainMass.com - View the original, and get the already-completed solution here!

1. Constant growth stocks
You are given the following information about three stocks:
- Chapman Tech is expected to pay a \$1.20 dividend at the end of the year. The required return on Chapman Tech's stock is 11% and its dividend is expected to grow at a constant rate of 7% per year.
- Rust Petroleum is expected to pay a \$1.50 dividend at the end of the year. Rust Petroleum's dividend yield and capital gains yield both equal 6%.
- Schubert Fabric's current stock price is \$15 per share, its required return is 13%, and its dividend yield is 8%.
Use the constant growth valuation formula to evaluate each stock's next expected dividend, current price, required return, expected dividend growth rate, and dividend yield. Assume the market is in equilibrium. In the table below, indicate which stock has the highest value for each of these metrics.

#### Solution Preview

"1. Constant growth stocks
You are given the following information about three stocks:
- Chapman Tech is expected to pay a \$1.20 dividend at the end of the year. The required return on Chapman Tech's stock is 11% and its dividend is expected to grow at a constant rate of 7% per year.
- Rust Petroleum is expected to pay a \$1.50 dividend at the end of the year. Rust Petroleum's dividend yield and capital gains yield both equal 6%.
- Schubert Fabric's current stock price is \$15 per share, its required return is 13%, and its dividend yield is 8%.
Use the constant growth valuation formula to evaluate each stock's next expected dividend, current price, required return, expected dividend growth rate, and dividend yield. Assume the market is in equilibrium. In the table below, indicate which stock has the highest value for each of these metrics."

Chapman Tech

Using the Dividend Discount (Constant Growth) Model

Po= Div1/ (r-g)

Dividend for next year= Div1 = \$1.20
Cost of equity= r= 11%
growth rate of dividends/earnings= g= 7.00%
Current stock price= Po= to be determined
Plugging in the values:
Po= 30.00 =1.2/(11.%-7.%)

Chapman Tech

Expected ...

#### Solution Summary

Answers questions on return on stocks using constant growth valuation formula.

\$2.19