Estimating the current value of a stock

Problem 1
Suppose a dividend of $1.25 was paid. The stock has a required rate of return of 11.2% and investors expect the dividend to grow at a constant rate of 10%. Complete parts (a) through (e) below.
a) Compute D0, D1, D2, D3 and D7.
b) Compute the present value of the dividends for t = 3 years.
c) Compute the current market price.
d) Assume that the constant growth rate is actually 0%. What is the current market price?
e) Describe the behavior of the present value of each future dividend (i.e. the behavior as t increases).

Problem 2
Suppose a dividend that pays at $1.07 has a growth rate of 20% for the first 3 years. After the 3 years, there is a long-run growth rate of 8%. The stock has a required rate of return of 12.4%. Find the current market price of a share of common stock.

Problem 3
Assume the beta coefficient for a company's stock is B = 0.2, the risk-free rate of return, rRF, is 8% and the required rate of return on the market, rM, is 14%. Assume the dividend expected during the coming year is D1 = $2.50 and the growth rate is a constant 7%. Complete parts (a) through (c) below.
a) Compute the price at which the company's stock should sell.
b) Find the new price of the stock assuming the risk-free rate of return is 5% and the required rate of return on the market is 11%.
c) What would be needed for a stock to be in equilibrium?

Solution Summary

Solution depicts the steps to estimate the current value of stock in the given cases. Calculations are carried out with the help of suitable formulas.