Font Paragraph Styles QUESTION 5 5a) Suppose a firm\'s stock is selling for $7.2
ID: 2409030 • Letter: F
Question
Font Paragraph Styles QUESTION 5 5a) Suppose a firm's stock is selling for $7.20. They just paid a $0.70 dividend and dividends are expected to grow at 5% per year. (10 marks) What is the required return? What is the dividend yield? What is the capital gains yield? (2 marks) (2 marks) (1 mark) 5b) Suppose a firm is expected to increase dividends by 14% in one year and by 9% in two years. After that, dividends will increase at a rate of 5% per year indefinitely. If the last dividend was $1.10 and the required return is 14%, what is the price of the stock, determining the expected future price? (3 marks) Find the PV of all expected future cash flows. You should calculate to three (2 marks) decimal points!Explanation / Answer
Question-1
Expected dividend
current dividend+(1+growth rate)
.7*(1.050
0.735
1-
required rate of return
(expected dividend/MP)+growth rate
(.735/7.20)+.05
15.21%
Present value of stock
(Expected dividend + selling price)/(1+r)^n
(.735+7.2)/(1.01521)
7.82
2-
Dividend yiled
dividend/market price
.735/7.2
10.21%
3-
Capital gain Yield
(market price-value of stock)/value of stock
(7.2-7.82)/7.82
-7.93%
Question-2
Year
Formula = current dividend*(1+r)^n
Expected dividend
1
1.1*1.14
1.254
2
1.254*1.09
1.36686
3
1.36686*1.09
1.489877
4
1.489877*1.05
1.564371
value of stock
expected dividend/(required return-growth rate)
1.564371/(14%-5%)
17.382
Year
Expected dividend
present value of cash inflow = cash flow/(1+r)^n r= 14%
1
1.254
1.1
2
1.36686
1.051754
3
1.489877
1.005625
3
17.3819
10.29148
present value of stock
13.449
Question-1
Expected dividend
current dividend+(1+growth rate)
.7*(1.050
0.735
1-
required rate of return
(expected dividend/MP)+growth rate
(.735/7.20)+.05
15.21%
Present value of stock
(Expected dividend + selling price)/(1+r)^n
(.735+7.2)/(1.01521)
7.82
2-
Dividend yiled
dividend/market price
.735/7.2
10.21%
3-
Capital gain Yield
(market price-value of stock)/value of stock
(7.2-7.82)/7.82
-7.93%
Question-2
Year
Formula = current dividend*(1+r)^n
Expected dividend
1
1.1*1.14
1.254
2
1.254*1.09
1.36686
3
1.36686*1.09
1.489877
4
1.489877*1.05
1.564371
value of stock
expected dividend/(required return-growth rate)
1.564371/(14%-5%)
17.382
Year
Expected dividend
present value of cash inflow = cash flow/(1+r)^n r= 14%
1
1.254
1.1
2
1.36686
1.051754
3
1.489877
1.005625
3
17.3819
10.29148
present value of stock
13.449