Hamilton Landscaping's dividend growth rate is expected to be 30% in the next year, drop to 15% from Year 1 to Year 2, and drop to a constant 5% after Year 2 and all subsequent years. Hamilton has just paid a dividend of $2.50 and its stock has a required return of 11%. a. What is Hamilton's estimated stock price today? Do Ts 90,1 91,2 GL 9 Year Dividend PV of dividends and PV of horizon value $2.50 11.0% 30% 15% 5% 0 = Po Short-run g; for Year 1 only. Short-run g; for Year 2 only. g: Long-run g; for Year 3 and all following years. 30% 1 15% 2 5% L 3 5% a. What is Hamilton's estimated stock price for Year 1? + = Horizon value = P₂ = D3 b. If you bought the stock at Year 0, what's your expected dividend yield and capital gains for the upcoming year? 1. Find the expected dividend yield. Dividend yield = 2. Find the expected capital gains yield. Use the estimated price for Year 1, P₁, to find the expected gain. Cap. Gain yield=
Hamilton Landscaping's dividend growth rate is expected to be 30% in the next year, drop to 15% from Year 1 to Year 2, and drop to a constant 5% after Year 2 and all subsequent years. Hamilton has just paid a dividend of $2.50 and its stock has a required return of 11%. a. What is Hamilton's estimated stock price today? Do Ts 90,1 91,2 GL 9 Year Dividend PV of dividends and PV of horizon value $2.50 11.0% 30% 15% 5% 0 = Po Short-run g; for Year 1 only. Short-run g; for Year 2 only. g: Long-run g; for Year 3 and all following years. 30% 1 15% 2 5% L 3 5% a. What is Hamilton's estimated stock price for Year 1? + = Horizon value = P₂ = D3 b. If you bought the stock at Year 0, what's your expected dividend yield and capital gains for the upcoming year? 1. Find the expected dividend yield. Dividend yield = 2. Find the expected capital gains yield. Use the estimated price for Year 1, P₁, to find the expected gain. Cap. Gain yield=
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
Related questions
Question
Stock Valuation. Why does the value of a share of stock depend on dividends? Based on the dividend growth model, what are the two components of the total return on a share of stock? A substantial percentage of the companies listed on the NYSE and the NASDAQ don’t pay dividends, but investors are nonetheless willing to buy shares in them. If the value of a share of stock depends on dividends, how is this possible?
Transcribed Image Text:Hamilton Landscaping's dividend growth rate is expected to be 30% in the next year, drop to
15% from Year 1 to Year 2, and drop to a constant 5% after Year 2 and all subsequent years.
Hamilton has just paid a dividend of $2.50 and its stock has a required return of 11%.
a. What is Hamilton's estimated stock price today?
Do
Ts
90,1
91,2
gL
PV of dividends and
PV of horizon value
P₁
g
Year
Dividend
P₁
P₁
$2.50
11.0%
30%
Short-run g; for Year 1 only.
15% Short-run g; for Year 2 only.
5%
0
= Po
=
Long-run g; for Year 3 and all following years.
=
30%
1
a. What is Hamilton's estimated stock price for Year 1?
15%
P₂
+
(1 + rs)
5%
+
=
3
5%
Horizon value = P₂
D₂
+
= D3
b. If you bought the stock at Year 0, what's your expected dividend yield and
capital gains for the upcoming year?
1. Find the expected dividend yield.
Dividend yield =
2. Find the expected capital gains yield.
Use the estimated price for Year 1, P₁, to find the expected gain.
Cap. Gain yield=
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