Question

​(Common stock valuation​) The common stock of NCP paid ​$ 1.45 in dividends last year. Dividends...

​(Common stock valuation​) The common stock of NCP paid ​$ 1.45 in dividends last year. Dividends are expected to grow at an annual rate of 5.50 percent for an indefinite number of years. a. If​ NCP's current market price is ​$ 27.23 per​ share, what is the​ stock's expected rate of​ return? b. If your required rate of return is 7.5 ​percent, what is the value of the stock for​ you? c. Should you make the​ investment? ​(Round to two decimal​ places.)

Homework Answers

Answer #1

1.The expected rate of return is calculated using the dividend discount model. It is calculated using the below formula:

Ke=D1/Po+g

where:

D1= Next year’s dividend

Po=Current stock price

g=Firm’s growth rate

Ke = $1.45*(1 + 0.0550) / $27.23 + 0.0550

= $1.5298 / $27.23 + 0.0550

= 0.0562 + 0.0550

= 0.1112*100

= 11.12%.

b.Value of the stock =D1/(r-g)

where:

D1=next dividend payment

r=interest rate

g=firm’s expected growth rate


Value of the stock today= $1.5298 / 0.075 - 0.055

= $1.5298 / 0.020

= $76.49.

c.The expected rate of return exceeds the required rate of return, therefore, the value of the security is greater than the current market price. Thus, I should buy the stock.

Know the answer?
Your Answer:

Post as a guest

Your Name:

What's your source?

Earn Coins

Coins can be redeemed for fabulous gifts.

Not the answer you're looking for?
Ask your own homework help question
Similar Questions
The common stock of NCP paid ​$1.50 in dividends last year. Dividends are expected to grow...
The common stock of NCP paid ​$1.50 in dividends last year. Dividends are expected to grow at an annual rate of 9.30 percent for an indefinite number of years. a. If​ NCP's current market price is ​$25.87 per​ share, what is the​ stock's expected rate of​ return? b. If your required rate of return is 11.3 ​percent, what is the value of the stock for​ you? c. Should you make the​ investment? a. If​ NCP's current market price is ​$25.87per​...
B) The common stock of AMT paid RM1.32 in dividends last year. Dividends are expected to...
B) The common stock of AMT paid RM1.32 in dividends last year. Dividends are expected to grow at an 8 percent annual rate for an indefinite number of years. i. If AMT’s current market price is RM23.50, what is the stock’s expected rate of return? ii. If your required rate of return is 10.5 percent, what is the value of the stock for you? iii. Should you make the investment, and why?
Mosser Corporation common stock paid $2.27 in dividends last year and is expected to grow indefinitely...
Mosser Corporation common stock paid $2.27 in dividends last year and is expected to grow indefinitely at an annual 6 percent rate. (a) If Mosser Corporation current market price is $30.08 per share, what is the stock's expected rate of return? (b) If your required rate of return is 16% percent, what is the value of the stock for you? (c) Should you make the investment? Why?
(Common stock valuation) Redford, Inc.’s outstanding common stock is currently selling in the market for $33....
(Common stock valuation) Redford, Inc.’s outstanding common stock is currently selling in the market for $33. Dividends of $2.30 per share were paid last year, return on equity is 20 percent, and its retention rate is 25 percent. 1. What is the value of the stock to you, given a 15 percent required rate of return? 2. Should you purchase this stock?​
A) Sintokyo Berhad’s seven-year RM1,000 par bonds pay 9 percent interest. Your required rate of return...
A) Sintokyo Berhad’s seven-year RM1,000 par bonds pay 9 percent interest. Your required rate of return is 7 percent. The current market price for the bond is RM1,100. i. Determine the expected rate of return ii. What is the value of the bonds to you given your required rate of return ? iii. Should you purchase the bond at the current market price? B) The common stock of AMT paid RM1.32 in dividends last year. Dividends are expected to grow...
Angus Corporation paid a dividend of $1.25 per share last year. Dividends are expected to grow...
Angus Corporation paid a dividend of $1.25 per share last year. Dividends are expected to grow at a rate of 5% per year into the foreseeable future. 1) Assume the current Treasury security rate is 4% and the average S&P 500 market return is 8%. ValueLine is reporting a beta of 1.35 for Angus. How much do you think a share of Angus stock is worth? 2) If Angus’ shares are currently selling for $35, what is the expected rate...
Objectives :- 1. The last dividend paid by New common stock was $5 per share. ($5...
Objectives :- 1. The last dividend paid by New common stock was $5 per share. ($5 =D0 here.) The dividends are expected to grow at 6% forever. If the required rate of return on New stock is 11% annually, what is the price of this stock? a.    $100 b.    $ 93 c.     $83 d) $106 2. The beta coefficient of a stock is a measure of its                a.   unsystematic risk                b.   systematic risk                c.   total risk               ...
Using the Dividend Valuation Model, calculate the following: What is the value of a common stock...
Using the Dividend Valuation Model, calculate the following: What is the value of a common stock that paid a $1.50 dividend at the end of the last year and is expected to pay a cash dividend in the future. Dividends are expected to grow at 7% annually and the investor’s required rate of return is 11%.
Murray Telecom paid a $5.00 per share stock dividend last year (D0). These dividends are expected...
Murray Telecom paid a $5.00 per share stock dividend last year (D0). These dividends are expected to grow at a rate of 8 percent per year for the next 4 years, 5 percent per year for the subsequent 2 years, and then level off into perpetuity at a growth rate of 2 percent per year. What should be the value of the firm’s stock if the required rate of return on similar securities is 12 percent? Please show calculations!
Murray Telecom paid a $5.00 per share stock dividend last year (D0). These dividends are expected...
Murray Telecom paid a $5.00 per share stock dividend last year (D0). These dividends are expected to grow at a rate of 8 percent per year for the next 4 years, 5 percent per year for the subsequent 2 years, and then level off into perpetuity at a growth rate of 2 percent per year. What should be the value of the firm’s stock if the required rate of return on similar securities is 12 percent? Please show calculations!