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# Stock Valuation

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Stock XYZ (end of the year values)
2003 2004 2005 2006 2007
Stock Price \$20.50 \$24.00 \$36.25 \$43.00 \$56.50
Dividends \$0.23 \$0.23 \$0.25 \$0.27 \$0.31

1. Calculate the compound annual rate of return on the stock investment.
2. For the dividends, calculate the a-arithmetic average annual growth rate, and b-geometric mean growth rate.
3. Using the growing perpetuity model (also called the dividend discount model) and the growth rate you determined in the previous question, solve for the shareholders' required rate of return that is implied by the 2007 stock price.(This is discount rate in the model). If you were unable to solve problem 2-b, assume a growth rate of 2.0 percent.

#### Solution Preview

Stock XYZ (end of the year values)
2003 2004 2005 2006 2007
Stock Price \$20.50 \$24.00 \$36.25 \$43.00 \$56.50
Dividends \$0.23 \$0.23 \$0.25 \$0.27 \$0.31

1.Â Â Â Â Â Â Â Â Â Â  Calculate the compound annual rate of return on the stock investment.

Year Stock Price Dividends
2003 \$20.50
2004 \$24.00 \$0.23
2005 \$36.25 \$0.25
2006 \$43.00 \$0.27
2007 \$56.50 \$0.31
Total \$1.06

Number of ...

#### Solution Summary

Calculates the compound annual rate of return on the stock investment. Also for the dividends, calculates the arithmetic average annual growth rate, and geometric mean growth rate. Using the growing perpetuity model (also called the dividend discount model) and the growth rate you determined previously, solves for the shareholders' required rate of return.

\$2.49