Question

- Using the following information to evaluate a stock
price.

A stock just paid its dividend of $2.00 and its required return is 13%.

- If the growth rate g = 0%, in other words, the dividend is constant at $2.00, what is the stock price? 837
- What if g is constant and is 6%? 33.3333
- What is the dividend yield and what is the capital gains yield for b?
- Assume g is non-constant, the growth rate is 30% for Year 0 to Year 1, 25% for Year 1 to Year 2, 15% for Year 2 to Year 3, and then long-run constant g = 6%, what is the stock price?
- Assume that the dividends are growing at 10% for the first two years and then grow at 6% forever after. What is the stock price?

Answer #1

**Answer(a):** Zero growth model: Where dividend
does not grow and remain same.

Formula: **P0 = D _{0} / Re**

Where P_{0} = stock price, D_{0} = Dividend, Re
= Required return.

P_{0} = ?, D_{0} = $2, Re = 13%.

Putting all the above values in the formula, we get:

P_{0} = 2 / .13

**P**_{0}**=
$15.38**

**Answer(2):** Constant growth model: Where the
dividend grows at a constant rate.

Formula: **P _{0} = D1 / (Re - g)**

Where D1 = D** _{0}** (1+g), g = 6%

Putting the value in the formula, we get:

P_{0} = 2 (1+.06) / (.13-.06)

P_{0} = 2.12 / .07

**P _{0} = $30.28**

**Answer(3): Dividend yield = Annual dividend / Current
stock price**

Annual dividend = $2.12, Current stock price = $30.28

Dividend yield: 2.12 / 30.28 = **7%**

**Capital gain yield = (Stock price after 1st period -
Initial stock price) / Initial stock price**

Capital gain yield = (30.28 - 15.38) / 15.38

**Capital gain yield = 96.88%**

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