Intermediate Financial Management (MindTap Course List)
13th Edition
ISBN: 9781337395083
Author: Eugene F. Brigham, Phillip R. Daves
Publisher: Cengage Learning
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Chapter 8, Problem 8P
A stock is trading at $80 per share. The stock is expected to have a yearend dividend of $4 per share (D1 = $4), and it is expected to grow at some constant rate, g, throughout time. The stock’s required
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A stock is trading at $80 per share. The stock is expected to have a year-end dividend of $4 per share (D1 = $4), and it is expected to grow at some constant rate g throughout time. The stock’s required rate of return is 14% (assume the market is in equilibrium with the required return equal to the expected return). What is your
forecast of g?
Suppose that Do = $1.00 and the stock's last closing price is $15.85. It is expected that earnings and dividends will grow at a constant rate of
g = 3.50% per year and that the stock's price will grow at this same rate. Let us assume that the stock is fairly priced, that is, it is in equilibrium,
and the most appropriate required rate of return is rs = 10.00%.
The dividend received in period 1 is D1 = $1.00 × (1+0.0350) = $1.04 and the estimated intrinsic value in the same period is based on the
D2
constant growth model: P₁: TS-8
Using the same logic, compute the dividends, prices, and the present value of each of the dividends at the end of each period.
Activity Frame
Dividend
Price
PV
t 10.00%
Period
(Dollars)
(Dollars)
(Dollars)
0
$1.00
$15.85
1
1.03
16.46
$0.94
2
1.07
17.08
$0.97
3
1.11
17.69
$1.01
4
1.15
18.31
$0.97
5
1.19
18.92
$0.94
The dividend yield for period 1 is
and it will
The capital gain yield expected during period 1 is
and it will
each period.
each period.
If it is…
Suppose that Do = $1.00 and the stock's last closing price is $26.25. It is expected that earnings and dividends will grow at a constant rate of
g = 5.00% per year and that the stock's price will grow at this same rate. Let us assume that the stock is fairly priced, that is, it is in equilibrium,
and the most appropriate required rate of return is rs = 9.00%.
The dividend received in period 1 is D₁ = $1.00 × (1+0.0500) = $1.05 and the estimated intrinsic value in the same period is based on the
constant growth model: P₁ = P²
Using the same logic, compute the dividends, prices, and the present value of each of the dividends at the end of each period.
Price
(Dollars)
$26.25
PV of dividend at 9.00%
(Dollars)
Dividend
Period (Dollars)
0
$1.00
1.05
1
2
3
4
5
The dividend yield for period 1 is
The capital gain yield expected during period 1 is
4.00%
O 5.00%
and it will
9.00%
If it is forecasted that the total return equals 9.00% for the next 5 years, what is the forecasted total return out…
Chapter 8 Solutions
Intermediate Financial Management (MindTap Course List)
Ch. 8 - Define each of the following terms: a. Proxy;...Ch. 8 - Two investors are evaluating General Electric’s...Ch. 8 - A bond that pays interest forever and has no...Ch. 8 - Explain how to use the free cash flow valuation...Ch. 8 - Thress Industries just paid a dividend of 1.50 a...Ch. 8 - Prob. 2PCh. 8 - Prob. 3PCh. 8 - Prob. 4PCh. 8 - A company currently pays a dividend of $2 per...Ch. 8 - EMC Corporation has never paid a dividend. Its...
Ch. 8 - Current and projected free cash flows for Radell...Ch. 8 - A stock is trading at $80 per share. The stock is...Ch. 8 - Constant Growth Valuation Crisp Cookwares common...Ch. 8 - Prob. 10PCh. 8 - Brushy Mountain Mining Companys coal reserves are...Ch. 8 - Prob. 12PCh. 8 - Nonconstant Growth Stock Valuation Simpkins...Ch. 8 - Prob. 14PCh. 8 - Return on Common Stock
You buy a share of The...Ch. 8 - Prob. 16PCh. 8 - Value of Operations
Kendra Enterprises has never...Ch. 8 - Free Cash Flow Valuation
Dozier Corporation is a...Ch. 8 - Prob. 19PCh. 8 - Prob. 20PCh. 8 - Prob. 1MCCh. 8 - Prob. 2MCCh. 8 - Prob. 3MCCh. 8 - Prob. 4MCCh. 8 - Use B&M’s data and the free cash flow valuation...Ch. 8 - Prob. 6MCCh. 8 - Prob. 7MCCh. 8 - Prob. 8MCCh. 8 - Prob. 9MCCh. 8 - Prob. 10MCCh. 8 - Prob. 11MCCh. 8 - Prob. 13MCCh. 8 - (1) Write out a formula that can be used to value...Ch. 8 - Assume that Temp Force has a beta coefficient of...Ch. 8 - Prob. 16MCCh. 8 - Now assume that the stock is currently selling at...Ch. 8 - Prob. 19MCCh. 8 - Prob. 20MCCh. 8 - Prob. 21MC
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- Now assume that the stock is currently selling at $30.29. What is its expected rate of return?arrow_forwardAn analyst has modeled the stock of a company using the Fama-French three-factor model. The market return is 10%, the return on the SMB portfolio (rSMB) is 3.2%, and the return on the HML portfolio (rHML) is 4.8%. If ai = 0, bi = 1.2, ci = 20.4, and di = 1.3, what is the stock’s predicted return?arrow_forwardThe price of a non-dividend-paying stock is $100. Suppose that the contínuously compounded risk-free rate is 1% per year, the market expected return is 7% (continuously compounded), the stock beta is 1.2, and the stock price volatility is 30% per year. Assume that the stock price follows the Geometric Brownian Motion. a) Solve for the expected stock return per year 0.32 (0.01 + 1.2 * 0.07) + = 0.139 b) A derivative pays off $100 if the stock price is in the range between $90 and $110 in year two and 0 otherwise. Determine its current price. 100 0.1392 = 75.73 c) What is the two-year 95% VaR if you short 100 shares of the stock today given that N (0.05) = -1.645? Note that the stock price follows a log normal distribution rather than a normal distributionarrow_forward
- You are thinking of buying a stock priced at $98 per share. Assume that the risk-free rate is about 4.7% and the market risk premium is 5.5%. If you think the stock will rise to $122 per share by the end of the year, at which time it will pay a $1.74 dividend, what beta would it need to have for this expectation to be consistent with the CAPM? The beta is (Round to two decimal places.)arrow_forwardA stock is expected to pay a dividend of $0.75 at the end of the year. The required rate of return is ?s = 10.5%, andthe expected constant growth rate is g = 6.4%. What is the stock's current price?arrow_forwardStocks X and Y have the following data. Assuming the stock market is efficient and the stocks are in equilibrium, which of the following statements is CORRECT? Price Expected growth (constant) Required return X O b) $50 5% 10% Y $50 6% 11% a) Stock Y has a higher dividend yield than Stock X. One year from now, Stock X's price is expected to be higher than Stock Y price. c) Stock X has the higher expected year-end dividend. d) Stock Y has a higher capital gains yield. e) Stock X has a higher dividend vield than Stock Varrow_forward
- A stock is expected to pay a dividend of $0.75 at the end of the year. The required rate of return is rs = 10.5%, and the expected constant growth rate is g = 7%. What is the stock's current price? Select the correct answer. a. $22.03 b. $21.43 c. $20.83 d. $20.23 e. $19.63arrow_forwardA stock is expected to pay a dividend of $1.65 at the end of the year. The required rate of return is rs = 9.32%, and the expected constant growth rate is g = 7.2%. What is the stock's current price?arrow_forwardA stock is trading at $80 per share. The stock is expected to have a year-end dividend of $4 per share which is expected to grow at some constant rate g throughout time. The stock's required rate of return is 14 percent. If you are an analyst who believes in efficient markets, what would be your forecast of g?arrow_forward
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