BUS 629 W2D1
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Apr 3, 2024
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W2D1
Calculations
Dividend Yield
: The dividend yield is calculated as the annual dividends paid divided by the current stock price.
Dividend Yield=Annual DividendsStock PriceDividend Yield=Stock PriceAnnual Dividends
Required Rate of Return (Ke)
: Using Formula 10-9, the required rate of
return is calculated as the dividend yield plus the growth rate. The formula
is given as:
Ke=Dividend Yield+Growth RateKe=Dividend Yield+Growth Rate
Given the growth rate is assumed to be 5%, let's perform these calculations.
P/E Ratio
: To provide the current P/E ratio, it has been identified from the
stock information as 44.34
The dividend yield for Knight-Swift Transportation Holdings Inc. (KNX) is approximately 0.94%, and the required rate of return (Ke) for an investment in the common stock, using an assumed growth rate of 5%, is approximately 5.94%.
P/E Ratio and Analysis
The current P/E ratio for KNX is 44.34.
Relationship and Analysis
1. The P/E ratio
is a measure of the market's expectations of a company's future earnings growth. A higher P/E ratio
indicates higher
future earnings expectations. Conversely, the required rate of return (Ke)
reflects the return investors require, considering the risk of the investment and the expected growth in dividends.
2.
Generally, a higher Ke
suggests that investors perceive more risk with
the company's future cash flows and require a higher return to compensate for this risk. Similarly, a higher P/E ratio
can indicate optimism about the company's growth prospects, although it can also suggest that the stock is overvalued.
3.
For KNX, a Ke of approximately 5.94% combined with a high P/E ratio of
44.34 suggests that investors might be expecting high growth in earnings but are also requiring a relatively moderate return on investment. This scenario indicates that despite the high growth expectations embedded in the P/E ratio, the required return is not exceedingly high, potentially due to the company's strong position or investor confidence in its business model.
High Ke and Low P/E Relationship
4.
The general relationship suggests that a high Ke
should correlate with a low P/E ratio
(and vice versa), as investors requiring a high return might perceive more risk, which would typically lower the P/E ratio. However, in the case of KNX, the high P/E ratio combined with a moderate Ke suggests that investors may be confident in the company's ability to grow its earnings substantially in the future.
Impact of Higher Than 5% Growth in Dividends
5.
If KNX were to grow its dividends at a rate higher than 5%, it could lead
to an increase in the stock price, assuming the market's perception of the company's risk and growth prospects remains positive. Higher
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Related Questions
The required return on a stock is equal to which one of the following if the dividend on the stock
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O Dividend yield - Capital gains yield
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O Dividend yield + Capital gains yield
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What’s the required rate of return for equity holder rs = ?
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h. Calculate the total return % in each of the following instances:
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b. Po = $32, Dividend yield % = 5%, P1 = $30
c. Dividend Yield = 4%; Capital Gain = $20; D1 = $4
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1. The rate at which a stock's price is expected to appreciate (or depreciate) is called the
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A. current
B. total
C. dividend
D. capital gains
2. The underlying assumption of the dividend growth model is that a stock is worth:
A. the present value of the future income that the stock generates.
B. the same amount to every investor regardless of his desired rate of return.
C. an amount computed as the next annual dividend divided by the market rate of retum.
D. an amount computed as the next annual dividend divided by the required rate of return.
3. The total rate of return earned on a stock is composed of which two of the following?
1. current yield
II. yield to maturity
III. dividend yield
IV. capital gains yield
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B. I and IV only
C. II and III only
D. III and IV only
4. Which one of the following correctly defines the constant dividend growth model?
A. R = (D₁ Po) + g
B. Po = (D₁R) + g
C. R=(Po Do) + g
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b. False
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D1
PO
(rs g)
Which of the following statements best describes how a change in a firm's stock price would affect a stock's capital
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The capital gains yield on a stock that the investor already owns has a direct relationship with the firm's
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6.10%
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16.96%
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A stock's next expected dividend divided by the current stock price is the:
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earnings yield
身
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A stock is selling today for $40 per share. At the end of the year, it pays a dividend of $2 per share and sells for $44.
Required:
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c. Now suppose the year-end stock price after the dividend is paid is $36. What are the dividend yield and percentage
capital.gain in this case?
Complete this question by entering your answers in the tabs below.
ces
Required A
Required B
Required C
What is the total rate of return on the stock? (Enter your answer as a whole percent.)
Rate of return
%
Reguired A
Required B >
a
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Select one:
O True
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Return ti: General
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Date
Dividends
8/18/2010
0.25
11/17/2010
0.25
2/14/2011
0.25
5/16/2011
0.25
8/16/2011
0.3
11/14/2011
0.3
2/13/2012
0.3
5/14/2012
0.3
8/13/2012
0.36
11/19/2012
0.36
2/15/2013
0.36
5/13/2013
0.36
8/19/2013
0.43
11/18/2013
0.43
2/14/2014
0.43
5/19/2014
0.43
8/18/2014
0.52
11/17/2014
0.52
2/13/2015
0.52
5/18/2015
0.52
8/17/2015
0.56
11/16/2015
0.56
2/12/2016
0.56
5/16/2016
0.56
8/15/2016
0.6
11/14/2016
0.6
2/13/2017
0.6
5/15/2017
0.6
8/14/2017
0.62
11/14/2017
0.62
2/20/2018
0.62
5/15/2018
0.62
8/14/2018
0.64
11/20/2018
0.64
2/19/2019
0.64
5/14/2019
0.64
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O
b. 9.97%
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Table 9
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Scenario
Cost of Equity Capital
Growth Rate in Earnings
P/E Ratio
1
0.13
0.09
2
0.13
0.11
3
0.15
0.09
4
0.18
0.09
5
0.18
0.11
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N (see, the following Equation).
Div
Div ₂
+ L +
1+FE (1+E)²
Po
=
+
PN
Div N
(1+re)^ *(1+r)^
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price (Po) in practice.
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O $-3.30
O $3.30
00
O $1.65
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Po
=
D₁
(Is - g)
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The capital gains yield on a stock that the investor already owns has an inverse relationship with the firm's expected future stock price.
The capital gains yield on a stock that the investor already owns has a direct relationship with the firm's expected future stock price.
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713.36%
657.93%
1,104.83%
14.95%
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Select one:
a.
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b.
The interest payment from a bond
c.
The expected dividend yield from a common stock
d.
The dividend yield from a preferred stock
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use EXCEL and provide Cell References for Calculations.
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Assume that a company’s market beta equals 0.8, the risk-free rate is 5%, and the market return equals 8%. Compute the company’s cost of equity capital.
Round answer to one decimal place (ex: 0.0245 = 2.5%)
Answer%
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