Dividend Theory and Stock Valuations
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Chapter 6: Practice Problems 10, 19
10. Stock Values. Integrated Potato Chips paid a $1 per share dividend yesterday. You expect the dividend to grow steadily at a rate of 4 percent per year.
a. What is the expected dividend in each of the next 3 years?
b. If the discount rate for the stock is 12 percent, at what price will the stock sell?
c. What is the expected stock price 3 years from now?
d. If you buy the stock and plan to hold it for 3 years, what payments will you receive?
What is the present value of those payments? Compare your answer to (b).
19. Constant-Growth Model. Here are data on two stocks, both of which have discount rates of 15 percent:
a. What are the dividend payout ratios for each firm?
b. What are the expected dividend growth rates for each firm?
c. What is the proper stock price for each firm?
Chapter 16: Practice Problems 20, 21, 22
20. Dividend Policy. Here are several assertions about typical corporate dividend policies. Which of them are true? Write out a corrected version of any false statements.
a. Most companies set a target dividend payout ratio.
b. They set each year's dividend equal to the target payout ratio times that year's earnings.
c. Managers and investors seem more concerned with dividend changes than dividend levels.
d. Managers often increase dividends temporarily when earnings are unexpectedly high for a year or two.
21. Dividend Policy. For each of the following four groups of companies, state whether you would expect them to distribute a relatively high or low proportion of current earnings and whether you would expect them to have a relatively high or low price-earnings ratio.
a. High-risk companies.
b. Companies that have recently experienced a temporary decline in profits.
c. Companies that expect to experience a decline in profits.
d. "Growth" companies with valuable future investment opportunities.
22. Dividend Policy. "Risky companies tend to have lower target payout ratios and more gradual adjustment rates." Explain what is meant by this statement. Why do you think it is so?
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Solution Summary
This posting answers various problems related to stock pricing, valuation and dividend policy. The concepts covered by the problems include constant growth model, target dividend model, dividend distribution policies.
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Chapter 6: Practice Problems 10, 19
10. Stock Values. Integrated Potato Chips paid a $1 per share dividend yesterday. You expect the dividend to grow steadily at a rate of 4 percent per year.
a. What is the expected dividend in each of the next 3 years?
In Year 1 = 1*(1+4%)^1=1.04
In year 2= 1*(1+4%)^2=1.0816
In Year 3= 1*(1+4%)^3=1.1249
b. If the discount rate for the stock is 12 percent, at what price will the stock sell?
P0=D0*(1+g)/(r-g) = 1*(1+4%)/(12%-4%)=13.00
c. What is the expected stock price 3 years from now?
P3=D3*(1+g)/(r-g) = 1.1249*(1+4%)/(12%-4%)=14.6237
d. If you buy the stock and plan to hold it for 3 years, what payments will you receive?
$1.04 at the end of year 1
$1.0816 at the end of year 2
$1.1249 at the end of year 3 + Selling price of 14.6237
What is the present value of those payments? Compare your answer to (b).
PV=1.04/1.12+1.0816/1.12^2+1.1249/1.12^3+14.6237/1.12^3=13.00
The value is same.
19. Constant-Growth Model. Here are data on two stocks, both of which have discount rates of 15 percent:
a. What are the dividend payout ratios for ...
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