Question

1. If you know that the dividend for the past year on a common stocks was 5 $ / shares, and the company achieved a growth rate of 12%, and the required rate of return that you accept to investment in this stock = 18% Find the intrinsic value of this stock?
2. If you know that the last year dividends on a common stock = 2.5 $/ share, and the company achieved a growth rate of 8% and the market price of this stock = 50 $ find the expected rate of return that the investor gets when buying the stock at market price?
3. If you know that the expected dividends at the end of the year on a common stock is 7 $ / share, and the market price of this stock = 70 $ and the expected rate of return obtained by the investor when buying the stock = 25% find the growth rate in dividends achieved by the company?
4. Find the value of preferred stock with a par value of 180 $ and a dividend rate = 10% per annum, offered in the market at 60 dinars, if you know that the required rate of return = 16%?

Answer 1

Question 1. Intrensic value of stock= Expected dividend per share/ (cost of Equity-growth rate)

Expected dividend per share= 5+12%=5.6

Intrensic value = 5.6/(0.18-0.12) = 93.33

Question 2. Rate of return = (Divident / Market Price) +growth rate

Dividend= 2.5+8%=2.7

Rate of return= (2.7/50)+0.08= 0.134 or 13.4%.

Question 3. We will use same formula as in question 2 to calculate growth rate.

0.25= (7/70)+ g

g= 0.15 or 15%

Question 4. Value of the preferred stock= Dividend/ Rate of Return

Dividend= 180×10%=18

Value of preferred stock= 18/0.16=112.50