The Duo Growth Company just paid a dividend of $1.00 per share. The dividend is expected to grow at a rate of 20% per year for the next three years and then to level off to 5% per year forever. You think the appropriate market capitalization rate is 15% per year. Required: a. What is your estimate of the intrinsic value of a share of the stock? Note: Use intermediate calculations rounded to 4 decimal places. Round your answer to 2 decimal places. b. If the market price of a share is equal to this intrinsic value, what is the expected dividend yield? Note: Use intermediate values rounded to 2 decimal places. Round your answer to 2 decimal places. c. What do you expect its price to be one year from now? Note: Use intermediate values rounded to 4 decimal places. Round your answer to 2 decimal places. d-1. What is the implied capital gain? Note: Use intermediate values rounded to 2 decimal places. Round your answer to 4 decimal places. d-2. Is the implied capital gain consistent with your estimate of the dividend yield and the market capitalization rate? a. Intrinsic value per share b. Expected dividend yield c. Expected price d-1. Implied Capital Gain d-2. Is this consistent with the DDM? %

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
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The Duo Growth Company just paid a dividend of $1.00 per share. The dividend is expected to grow at a rate of 20% per year for the
next three years and then to level off to 5% per year forever. You think the appropriate market capitalization rate is 15% per year.
Required:
a. What is your estimate of the intrinsic value of a share of the stock?
Note: Use intermediate calculations rounded to 4 decimal places. Round your answer to 2 decimal places.
b. If the market price of a share is equal to this intrinsic value, what is the expected dividend yield?
Note: Use intermediate values rounded to 2 decimal places. Round your answer to 2 decimal places.
c. What do you expect its price to be one year from now?
Note: Use intermediate values rounded to 4 decimal places. Round your answer to 2 decimal places.
d-1. What is the implied capital gain?
Note: Use intermediate values rounded to 2 decimal places. Round your answer to 4 decimal places.
d-2. Is the implied capital gain consistent with your estimate of the dividend yield and the market capitalization rate?
a. Intrinsic value per share
b. Expected dividend yield
c. Expected price
d-1. Implied Capital Gain
d-2. Is this consistent with the DDM?
%
Transcribed Image Text:The Duo Growth Company just paid a dividend of $1.00 per share. The dividend is expected to grow at a rate of 20% per year for the next three years and then to level off to 5% per year forever. You think the appropriate market capitalization rate is 15% per year. Required: a. What is your estimate of the intrinsic value of a share of the stock? Note: Use intermediate calculations rounded to 4 decimal places. Round your answer to 2 decimal places. b. If the market price of a share is equal to this intrinsic value, what is the expected dividend yield? Note: Use intermediate values rounded to 2 decimal places. Round your answer to 2 decimal places. c. What do you expect its price to be one year from now? Note: Use intermediate values rounded to 4 decimal places. Round your answer to 2 decimal places. d-1. What is the implied capital gain? Note: Use intermediate values rounded to 2 decimal places. Round your answer to 4 decimal places. d-2. Is the implied capital gain consistent with your estimate of the dividend yield and the market capitalization rate? a. Intrinsic value per share b. Expected dividend yield c. Expected price d-1. Implied Capital Gain d-2. Is this consistent with the DDM? %
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