Paul Dargis has analyzed five stocks and estimated the dividends they will pay n
ID: 2759036 • Letter: P
Question
Paul Dargis has analyzed five stocks and estimated the dividends they will pay next year as well as their prices at the end of the year. His projections are shown below. Compute the dividend yield, capital gains yield, and total one-year return implied by Paul's estimates for each stock. Round the answers to two decimal places. Use a minus sign, to indicated negative answers. If an answer is zero, enter "0". The stock of Sedly Inc. is expected to pay the following dividends. At the end of the fourth year its value is expected to be $37.40. What should Sedly sell for today if the return on stocks of similar risk is 10%? Round PVF values in intermediate calculations to four decimal places. Round the answer to two decimal places. Mitech Corps stock price has been growing at approximately 9% for several years, and is now $34. Based on past growth rate performance, what would you expect the stock's price to be in seven years? Round the answer to two decimal places. Do not round your intermediate calculations.Explanation / Answer
Stock
A
B
C
D
E
1
Projected Dividend
$1.50
$0.85
$2.10
$0.00
$3.10
2
Current price
$37.00
$24.00
$58.00
$75.00
$64.50
3
Dividend yield (1/2)
4.05%
3.54%
3.62%
0.00%
4.81%
4
Projected stock price
$45.00
$25.00
$64.00
$85.00
$64.00
5
Current price
$37.00
$24.00
$58.00
$75.00
$64.50
6
Capital gain (4-5)
$8.00
$1.00
$6.00
$10.00
-$0.50
7
Capital gains yield (6/5)
21.62%
4.17%
10.34%
13.33%
-0.78%
8
Total yield (3+7)
25.68%
7.71%
13.97%
13.33%
4.03%
8.
Price of share today = Present value of expected dividends + Present value of end of year 4 value
Year
Present value factor@ 10%
Present value
1
Dividend
$2.35
0.9091
$2.14
2
Dividend
$3.50
0.8265
$2.89
3
Dividend
$1.70
0.7514
$1.28
4
Dividend
$2.00
0.6831
$1.37
4
Value of share
$37.40
0.6831
$25.55
$33.22
9.
Current stock price = $34
Annual growth rate = 9%
Stock price at the end of Year 7 = $34 * 1.097 = $34 * 1.8280 = $62.15
Stock
A
B
C
D
E
1
Projected Dividend
$1.50
$0.85
$2.10
$0.00
$3.10
2
Current price
$37.00
$24.00
$58.00
$75.00
$64.50
3
Dividend yield (1/2)
4.05%
3.54%
3.62%
0.00%
4.81%
4
Projected stock price
$45.00
$25.00
$64.00
$85.00
$64.00
5
Current price
$37.00
$24.00
$58.00
$75.00
$64.50
6
Capital gain (4-5)
$8.00
$1.00
$6.00
$10.00
-$0.50
7
Capital gains yield (6/5)
21.62%
4.17%
10.34%
13.33%
-0.78%
8
Total yield (3+7)
25.68%
7.71%
13.97%
13.33%
4.03%