Question

You are offered two stocks, but aren’t sure if quoted the prices are reasonable. So you...

You are offered two stocks, but aren’t sure if quoted the prices are reasonable. So you decide to determine the fair price of both given some additional information you found.

Stock name: A

Dividend: 4.75$

initial growth: 2%

Later growth: 2% forever

Stock name: B

Dividend: 4.75$

initial growth: 4% annually for the next 8 years (years 2-9)

later growth: flat thereafter (DIV10 = DIV9) forever

Your assumed annual discount rate is 11%.

What is the price of stock Z?

A. $60.37

B. $55.43

C. $51.33

D. $49.84

E. $49.06

Business   Finance   
0 0
Add a commentTranscribed image text
Next >

Homework Answers

Answer #1

THE PRICE OF STOCK IS THE PRESENT VALUE OF ALL DIVIDEND RECEIVED FROM IT.

STOCK A
PRICE = DIV (1+g) / r-g
4.75 x (1+0.02) / (.11-.02)
53.83333333
STOCK B
YR CF DF 11% PV
1 4.75 0.901 4.27975
2 4.94 0.812 4.01128
3 5.14 0.731 3.75734
4 5.35 0.659 3.52565
5 5.56 0.593 3.29708
6 5.78 0.535 3.0923
7 6.01 0.482 2.89682
8 6.25 0.434 2.7125
9 6.5 0.391 2.5415
10 TO INFINITY 6.5 3.554545 23.10455
53.21877
0 0
Know the answer?
Your Answer:

Post as a guest

Your Name:

What's your source?

Earn Coins

Coins can be redeemed for fabulous gifts.

Log In

Sign Up

Not the answer you're looking for?
Ask your own homework help question
Similar Questions
You are offered two stocks, but aren’t sure if quoted the prices are reasonable. So you...
You are offered two stocks, but aren’t sure if quoted the prices are reasonable. So you decide to determine the fair price of both given some additional information you found. Stock name: A Dividend: 4.75$ initial growth: 2% Later growth: 2% forever Stock name: B Dividend: 4.45$ initial growth: 4% annually for the next 8 years (years 2-9) later growth: flat thereafter (DIV10 = DIV9) forever Your assumed annual discount rate is 11%. What is the price of stock B?...
Consider the following three stocks: Stock A is expected to provide a dividend of $11.10 a...
Consider the following three stocks: Stock A is expected to provide a dividend of $11.10 a share forever. Stock B is expected to pay a dividend of $6.10 next year. Thereafter, dividend growth is expected to be 5.00% a year forever. Stock C is expected to pay a dividend of $4.90 next year. Thereafter, dividend growth is expected to be 21.00% a year for five years (i.e., years 2 through 6) and zero thereafter. a-1. If the market capitalization rate...
Consider the following three stocks: Stock A is expected to provide a dividend of $11.40 a...
Consider the following three stocks: Stock A is expected to provide a dividend of $11.40 a share forever. Stock B is expected to pay a dividend of $6.40 next year. Thereafter, dividend growth is expected to be 2.00% a year forever. Stock C is expected to pay a dividend of $4.60 next year. Thereafter, dividend growth is expected to be 18.00% a year for five years (i.e., years 2 through 6) and zero thereafter. a-1. If the market capitalization rate...
You have purchased a bond one year ago. When you purchased this bond, it has a...
You have purchased a bond one year ago. When you purchased this bond, it has a face value of $2500 with an annual coupon rate of 5% and 10 years to maturity. Calculate the price of this bond today if the required annual rate of return of similar bonds is 8 per cent. [15 marks] b. How does your answer to (a) change with semi-annual coupon payments and a semi-annual discount rate of 4 per cent? Comment on your answer....
A company pays dividends annually on Dec. 31. Yesterday's dividend was $1. Dividends are expected to...
A company pays dividends annually on Dec. 31. Yesterday's dividend was $1. Dividends are expected to grow for the next 2 years at 10% and then settle down to a longrun growth rate of 5% in perpetuity. Because of the initial riskiness of the company, investors required a 20% rate of return over the first 2 years, but only a 12% rate of return thereafter. What is the fair price for the stock today, January 1?
You feel that Stock X will be able to grow its dividend by 10% per year...
You feel that Stock X will be able to grow its dividend by 10% per year for the next two years, after which time the growth rate will drop to 3% and then stay at that rate forever. You feel that a discount rate of 10% is fair, given the company’s risk. Earlier today, Stock X paid a dividend of $0.72 per share. According to your expectations, what should be Stock X’s current price? Write your answer out to the...
A firm will pay a dividend of $0 one year from today and $5.00 two years...
A firm will pay a dividend of $0 one year from today and $5.00 two years from today (that is, D1 = $0 and D2 = 5.00). Thereafter, the dividend is expected to grow at a constant rate forever. The price of this stock today is $100 and the required rate of return on the stock is 10%. What is the expected constant growth rate of the dividend stream from year 2 to infinity? For this problem, you must compute...
1. (a) What are the two components of most stocks’ expected total return? (b) How does...
1. (a) What are the two components of most stocks’ expected total return? (b) How does one calculate the capital gains yield and the dividend yield of a stock? (c) If D1 = RM3.00, P0 = RM50, and the expected P at t=1 is equal to RM52, what are the stock’s expected dividend yield, capital gains yield, and total return for the coming year? 2. (a) Are stock prices affected more by long-term or short-term performance? Explain. (b) A stock...
PLEASE ANSWER ALL, if you are not going to answer all, DO NOT answer at all...
PLEASE ANSWER ALL, if you are not going to answer all, DO NOT answer at all ! thank you !! 2.Gary King is interested in buying the stock of First National Bank. While the bank's management expects no growth in the near future, Gary is attracted by the dividend income. Last year the bank paid a dividend of $7.20. If Gary requires a return of 12.5 percent on such stocks, what is the maximum price he should be willing to...
In practice, the use of the dividend discount model is refined from the method presented in...
In practice, the use of the dividend discount model is refined from the method presented in the textbook. Many analysts will estimate the dividend for the next 5 years and then estimate a perpetual growth rate at some point in the future, typically 10 years. Rather than have the dividend growth fall dramatically from the fast growth period to the perpetual growth period, linear interpolation is applied. That is, the dividend growth is projected to fall by an equal amount...
ADVERTISEMENT
Need Online Homework Help?

Get Answers For Free
Most questions answered within 1 hours.

Ask a Question
ADVERTISEMENT