Sam Forbes and Jenny Hewes are senior vice-presidents of the First Creek Investment Council . They are co-directors of the company's pension fund management division, with Sam having responsibility for fixed income securities (primarily bonds) and Jneey being responsible for equity investments. A major new client has requested that council present an investment seminar to Executive Committee, and Forbes and Hewes, who will make the actual presentation, have asked you, a recent UCW graduate to help them.
to illustrate the common stock valuation process, Sam and Jenny have asked you to analyze the Temp Force Company, an employment agency that supplies word processor operators and computer programmers to businesses with temporarily heavy workloads. You are to answer the following questions. the required rate of return in of the firm's stock is 11.8%.
. Assume that Temp Force is a constant growth company whose last dividend (Do, which was paid yesterday) was $2.00, and whose dividend is expected to grow indefinitely at a 5 percent rate.
What is the firm’s current stock price?
What is the stock's expected value 1 year from now?
1.The price of the stock is calculated with the help of the dividend discount model.
Price of the stock today=D1/(r-g)
where:
D1=next dividend payment
r=interest rate
g=firm’s expected growth rate
Price of the stock today= $2*(1 + 0.05) / 0.118 – 0.05
= $2.10 / 0.0680
= $30.88.
2.The expected value of the stock is calculated with the help of the dividend discount model.
Value of the stock 1 year from now= D1/(r-g)
where:
D1=next dividend payment
r=interest rate
g=firm’s expected growth rate
Price of the stock today= $2.10*(1 + 0.05) / 0.118 – 0.05
= $2.2050 / 0.0680
= $32.4265 $32.43.
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