Question

Non-constant growth model problem Show all work.

Formulas:

DAA's stock is selling for $15 per share. The firm's income, assets, and stock price have been growing at an annual 15 percent rate and are expected to continue to grow at this rate for 3 more years. No dividends have been declared as yet, but the firm intends to declare a dividend of D3 = $2.00 at the end of the last year of its supernormal growth. After that, dividends are expected to grow at the firm's normal growth rate of 6 percent. The firm's required rate of return is 18 percent.

A. Draw a timeline of the cash flows for DAA for the next 4 years.

B. Calculate the value of the stock today, Po.

DAA Continued.

C. Is this stock currently fairly priced? Explain.

D. Calculate the dividend yield, capital gains yield and total yield expected in the first year.

E. Based on your computed yields for DAA. What can you conclude about using the dividend model for DAA’s stock and why?

Answer #1

**Question - A**

**Cashflow Timeline**

**Question No. 02**

Dividend in Year -3 = $2

Required Rate of Return = 18%

Growth Rate = 6%

Value of Stock at the end of Year-3 = 2/(0.18-0.06) = $ 16.67

Value of Stock Today = 16.67/(1+0.18)3 = $10.14

**Question No. 03**

Fair Value of Stock = $ 10.14

Current Selling Price = $ 15.00

The Stock is Overvalued

**Question No.04**

Value of Stock at the end of Year - 1 = 10.14 * 1.18 = $ 11.97

Dividend Yield = 0%

Capital Gain Yield = (11.97-10.14)/10.14 = 18%

Therefore TOtal Yield = 18%

**Question No. 05**

Based on the Computed Yield, we can conclude to use dividend model for valuation of Stock, because of the value of increase of stock value at an expected rate.

ABC Company's last dividend was $0.7. The dividend growth rate
is expected to be constant at 7% for 4 years, after which dividends
are expected to grow at a rate of 4% forever. The firm's required
return (rs) is 15%. What is its current stock price (i.e. solve for
Po)?

ABC Company's last dividend was $3.5. The dividend growth rate
is expected to be constant at 6% for 4 years, after which dividends
are expected to grow at a rate of 4% forever. The firm's required
return (rs) is 9%. What is its current stock price (i.e. solve for
Po)?

Which of the following statements is incorrect regarding the
constant growth model?
a.Another name for the dividend to be received in one year
divided by the current stock price is the expected dividend
yield.
b.The constant growth model assumes that earnings, dividends and
stock prices are expected to grow at a constant rate.
c.If the dividend growth rate is zero, the constant growth model
becomes a zero-growth valuation model.
d.The constant growth model can still be used if the required...

Which of the following statements is incorrect regarding the
constant growth model?
Group of answer choices
If the dividend growth rate is zero, the constant growth model
becomes a zero-growth valuation model.
The constant growth model can still be used if the required rate
of return is less than the dividend growth rate.
Another name for the dividend to be received in one year divided
by the current stock price is the expected dividend yield.
The constant growth model calculates...

16. Which of the following statements is CORRECT? (2pts)
a. The constant growth model takes into consideration the
capital gains investors expect to earn on a stock
b. It is appropriate to use the constant growth model to
estimate a stock's value even if its growth rate is never expected
to become constant.
c. If a stock has a required rate of return ke = 12%, and if its
dividend is expected to grow at a constant rate of 5%,...

9. ABC, Inc stock currently sells for $45 per share. The market
requires a 9 percent return on the firm's stock. If the company
maintains a constant 5.5 percent growth rate in dividends, what was
the most recent dividend per share paid on the stock?
10. ABC, Inc pays dividends annually. The expected dividend
payment in year 5 is $12.00. The growth rate, which is currently
15%, is expected to decline linearly over six years, between year 5
and year...

Common stock valuelong dashVariable growth Lawrence
Industries' most recent annual dividend was $2.46 per share
(D0equals$ 2.46), and the firm's required return is 12%. Find
the market value of Lawrence's shares when dividends are expected
to grow at 15% annually for 3 years, followed by a 7% constant
annual growth rate in years 4 to infinity.
The market value of Lawrence's shares is $ . (Round to the
nearest cent.)

Show your work in solving the problem
Membo just paid a dividend of $2.2 per share. Dividends are
expected to grow at 7%, 6%, and 4% for the next three years
respectively. After that the dividends are expected to grow at a
constant rate of 3% indefinitely. Stockholders require a return of
8 percent to invest in Membo’s common stock. Compute the value of
Membo’s common stock today.

Murray Telecom just paid a $3.50 per share stock dividend
(D0). Dividends are expected to grow at a rate of 8
percent per year for the next 6 years, 4 percent per year for the
subsequent 4 years, and then level off into perpetuity at a growth
rate of 2 percent per year. Using the dividend growth model, what
should be the value of the firm’s common stock if the required rate
of return on similar securities is 11.25 percent?

5 & 7
5. Problem 9.11 (Valuation of a Constant Growth
Stock)
A stock is expected to pay a dividend of $1.00 at the end of the
year (i.e., D1 = $1.00), and it should continue to grow
at a constant rate of 6% a year. If its required return is 15%,
what is the stock's expected price 1 year from today? Do not round
intermediate calculations. Round your answer to the nearest
cent.
$
7. Problem 9.14 (Nonconstant Growth)
Computech Corporation...

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