Question

**Expected returns, dividends, and growth**

The constant growth valuation formula has dividends in the numerator. Dividends are divided by the difference between the required return and dividend growth rate as follows:

P̂0 | = | D1/(rs − gL) |

Which of the following statements best describes how a change in a firm’s stock price would affect a stock’s capital gains yield?

a.The capital gains yield on a stock that the investor already owns has an inverse relationship with the firm’s expected future stock price.

b.The capital gains yield on a stock that the investor already owns has a direct relationship with the firm’s expected future stock price.

Walter Utilities is a dividend-paying company and is expected to pay an annual dividend of $2.25 at the end of the year. Its dividend is expected to grow at a constant rate of 7.50% per year. If Walter’s stock currently trades for $16.00 per share, what is the expected rate of return?

8.70%

7.63%

21.56%

17.06%

Which of the following conditions must hold true for the constant growth valuation formula to be useful and give meaningful results?

a. The company’s stock cannot be a zero growth stock.

b. The required rate of return, rss, must be greater than the long-run growth rate.

c. The company’s growth rate needs to change as the company matures.

Answer #1

The answer is

b.The capital gains yield on a stock that the investor already owns has a direct relationship with the firm’s expected future stock price.

As Capital Gains Yield = (Future Price – Current price)/Current Price

Stock Price = Expected Dividend/(Expected Rate of return – growth rate)

16 = 2.25/(Expected Rate of return – 7.50%)

Expected rate of return = 21.5625%

i.e. 21.56%

b. The required rate of return, rss, must be greater than the long-run growth rate.

as the formula does not work when the growth rate is higher than the required return

The constant growth valuation formula has dividends in the
numerator. Dividends are divided by the difference between the
required return and dividend growth rate as follows:
Pˆ0P̂0
= =
D1(rs – g)D1(rs – g)
Which of the following statements is true?
a- Increasing dividends will always decrease the stock price,
because the firm is depleting internal funding resources.
b- Increasing dividends may not always increase the stock price,
because less earnings may be invested back into the firm and that
impedes...

Answer the following questions regarding dividend discount
models:
What are the two components of most stocks’ expected total
return?
What is the general formula to calculate the capital gains yield
and the dividend yield of a stock
(one that holds when firm’s dividends are growing at a constant
rate and when they are not)?
Write out and explain the dividend discount model formula for a
constant growth stock. What is
the capital gains yield and dividend yields for a constant...

Prove that for a stock with dividends that grow at a constant
rate, the capital gains yield equals the growth rate. (Hint: to
prove the result, remember that the required rate of return is
equal to the capital gains yield plus the dividend yield).

Nonconstant Growth Stock Valuation Assume that the average firm
in your company's industry is expected to grow at a constant rate
of 4% and that its dividend yield is 8%. Your company is about as
risky as the average firm in the industry and just paid a dividend
(D0) of $3. You expect that the growth rate of dividends will be
50% during the first year (g0,1 = 50%) and and 25% during the
second year (g1,2 = 25%). What...

The OWB Company paid $2.1 of dividends this year. If its
dividends are expected to grow at a rate of 3 percent per year,
what is the expected dividend per share for OWB five years from
today?
The current price of ABC stock is $35 per share. If ABC’s
current dividend is $1.5 per share and investors ‘required rate of
return is 10 percent, what is the expected growth rate of dividends
for ABC. Use constant dividend growth model.
Consider...

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%,...

1- Turbo Technology Computers is experiencing a period of rapid
growth. Earnings and dividends are expected to grow at a rate of
15% during the next two years, at 13% in the third year, and at a
constant rate of 6% thereafter. Turbo's last dividend was $1.15,
and the required rate of return on the stock is 12%.
Complete the following calculations:
Calculate the value of the stock today.
Calculate P1^ and P2^.
Calculate the dividend yield and capital gains...

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...

(7-2) Constant Growth Valuation
Boehm Incorporated is expected to pay a $1.50 per share dividend
at the end of this year (i.e., D1=$1.50D1=$1.50). The dividend is
expected to grow at a constant rate of 6% a year. The required rate
of return on the stock, rsrs, is 13%. What is the estimated value
per share of Boehm’s stock?
(7-4) Preferred Stock Valuation
Nick’s Enchiladas Incorporated has preferred stock outstanding
that pays a dividend of $5 at the end of each...

(7-2) Constant Growth Valuation
Boehm Incorporated is expected to pay a $1.50 per share dividend
at the end of this year (i.e., D1=$1.50D1=$1.50). The dividend is
expected to grow at a constant rate of 6% a year. The required rate
of return on the stock, rsrs, is 13%. What is the estimated value
per share of Boehm’s stock?
(7-4) Preferred Stock Valuation
Nick’s Enchiladas Incorporated has preferred stock outstanding
that pays a dividend of $5 at the end of each...

ADVERTISEMENT

Get Answers For Free

Most questions answered within 1 hours.

ADVERTISEMENT

asked 23 minutes ago

asked 29 minutes ago

asked 30 minutes ago

asked 42 minutes ago

asked 1 hour ago

asked 1 hour ago

asked 1 hour ago

asked 1 hour ago

asked 1 hour ago

asked 1 hour ago

asked 1 hour ago

asked 2 hours ago