Purchase Solution

Stock Value and Rate of Return of Dividend

Not what you're looking for?

Ask Custom Question

ABC currently pays a dividend of $2 a share and the dividend will grow at 15$ per year for 3 years, and then at 10% for the next 3 years, later it is expected to grow at 5% forever.
1)What value would place on the stock at a rate of return of 18%?
2)Would your value change if you held the stock for only 3 years?

Please explain in details the steps of solving this problem and please attach any Excel sheets.

Purchase this Solution
Solution Summary

Answers questions on stock valuation

Solution Preview

Please see the attached file:
ABC currently pays a dividend of $2 a share and the dividend will grow at 15% per year for 3 years, and then at 10% for the next 3 years, later it is expected to grow at 5% forever.

1)What value would place on the stock at a rate of return of 18%?

r= 18.00%

Year Dividend growth rate Dividend
0 D0 $2.000
1 D1 15% $2.3000 =( 1 + 15.% ) x $2.
2 D2 15% $2.6450 =( 1 + 15.% ) x $2.3
3 D3 15% $3.0418 =( 1 + 15.% ) x $2.645
4 D4 10% $3.3460 =( 1 + 10.% ) x $3.0418
5 D5 10% $3.6806 =( 1 + 10.% ) x $3.346
6 D6 10% $4.0487 =( 1 + 10.% ) x $3.6806
7 D7 5.0% $4.2511 =( 1 + 5.% ) x $4.0487

Find the price of the stock at end of year ...

Purchase this Solution
Free BrainMass Quizzes
Business Processes

This quiz is intended to help business students better understand business processes, including those related to manufacturing and marketing. The questions focus on terms used to describe business processes and marketing activities.

Production and cost theory

Understanding production and cost phenomena will permit firms to make wise decisions concerning output volume.

Basics of corporate finance

These questions will test you on your knowledge of finance.

Lean your Process

This quiz will help you understand the basic concepts of Lean.

Introduction to Finance

This quiz test introductory finance topics.

View More Free Quizzes
Related BrainMass Solutions

  • Calculate value, dividend, required rate of return, dividend growth

    Preferred Stock B: Value = $78, Required Rate of Return = 24%, Dividend = ? Preferred Stock C: Value = $38.75, Dividend = $3, Required Rate of Return = ?

  • Intrinsic Value of a Stock and the Dividend Discount Model

    Value of stock = DPS1 / Re - G Where; DPS1 = dividend 1 year from now Re = required rate of return G = dividend growth rate in perpetuity 6% Value of stock = ($3.00 x 1.055) / 6% - 5.5% Value of stock = $3.165 / 0.005 Value of stock = $633 8%

  • Stock's value in three scenarios

    The firm's dividend is expected to grow at a constant rate of 5% per year, and investors require a 15 % rate of return on the stock. 1. What is the stock value?

  • Calculating the market price of a stock

    Stock A has a beta coefficient of 1.4, an earnings and dividend growth rate of 5 percent, and a current dividend of $2.60 a share. A) What should be the market price of the stock?

  • How to Value Common Stock & Return Income

    First method: Present value of common stock= dividend/ required rate of return For example: Dividend= $ 10 per share Required rate of return=20% Present value of common stock= $10/20%=$50 per share.

  • Various Security Valuation Models

    Dividend=D=14% of par value=100*14%=$14 Discount rate=r=12% Current value of preferred stock=D/r=14/12%=$116.67 6.

  • Calculating total Dollar Return and Rate of Return

    Dollar return=Change in market Value of stock+ Dividend income Change in market value per share =($21-$15)=$6 Dividend income per share =$0.90 Dollar return=Change in market Value of stock+ Dividend income = (6*400+0.90*400)= $2760

  • Calculating fair value of stocks

    Current dividend=Do=$1.00 Growth rate =7% Expected dividend next year=D1=Do*(1+g)=1*(1+7%)=$1.07 Required rate of return=r=10% Fair Value of stock=D1/(r-g)=1.07/(10%-7%)=$35.66667 or $35.67 Solution describes the steps to find out the fair value of

  • Determining Stock Price and Equilibrium Expected Growth Rate

    541181 Determining Stock Price and Equilibrium Expected Growth Rate Problem 1 A stock is expected to pay a dividend of $0.75 at the end of the year. The required rate of return is rs = 10.5%, and the expected constant growth rate is g = 6.4%.

  • Rate of Return on an Investment

    What is the annual rate of return on an investment in a common stock that cost $40.50 if the current dividend is $1.50 and the growth in the value of the shares and the dividend is 8 percent?

View More Related Solutions