1. Phoenix Company common stock is currently selling for $20 per share. Security analysts at Smith Blarney have assigned the following probability distribution to the price of (and rate of return on) Phoenix stock one year from now: Price $16 20 24 28 Rate of Return -20% 0% +20% +40% Probability 0.25 0.30 0.25 0.20 Assuming that Phoenix is not expected to pay any dividends during the coming year, determine the expected rate of return on Phoenix Stock.
Dividend Valuation
Dividend refers to a reward or cash that a company gives to its shareholders out of the profits. Dividends can be issued in various forms such as cash payment, stocks, or in any other form as per the company norms. It is usually a part of the profit that the company shares with its shareholders.
Dividend Discount Model
Dividend payments are generally paid to investors or shareholders of a company when the company earns profit for the year, thus representing growth. The dividend discount model is an important method used to forecast the price of a company’s stock. It is based on the computation methodology that the present value of all its future dividends is equivalent to the value of the company.
Capital Gains Yield
It may be referred to as the earnings generated on an investment over a particular period of time. It is generally expressed as a percentage and includes some dividends or interest earned by holding a particular security. Cases, where it is higher normally, indicate the higher income and lower risk. It is mostly computed on an annual basis and is different from the total return on investment. In case it becomes too high, indicates that either the stock prices are going down or the company is paying higher dividends.
Stock Valuation
In simple words, stock valuation is a tool to calculate the current price, or value, of a company. It is used to not only calculate the value of the company but help an investor decide if they want to buy, sell or hold a company's stocks.
![**Understanding Probability Distribution for Phoenix Company Stock**
Phoenix Company common stock is currently priced at $20 per share. Security analysts at Smith Blarney have projected the following probability distribution for the stock's price and rate of return one year from now:
| Price | Rate of Return | Probability |
|-------|----------------|-------------|
| $16 | -20% | 0.25 |
| $20 | 0% | 0.30 |
| $24 | +20% | 0.25 |
| $28 | +40% | 0.20 |
**Details and Analysis**
- **Current Stock Price**: $20
- **Probable Future Prices**: $16, $20, $24, $28
- **Possible Rates of Return**: -20%, 0%, +20%, +40%
**Probability Distribution Overview**:
- There's a 25% chance the price will drop to $16 (a rate of return of -20%).
- There’s a 30% chance it will remain at $20 (0% return).
- There’s a 25% chance it will rise to $24 (+20% return).
- There’s a 20% chance it will increase to $28 (+40% return).
**Expected Rate of Return Calculation**
Assuming no dividends are paid, the expected rate of return can be calculated using the formula:
\[ \text{Expected Return} = (\text{-20\%} \times 0.25) + (\text{0\%} \times 0.30) + (\text{20\%} \times 0.25) + (\text{40\%} \times 0.20) \]
By calculating this, investors can better understand potential future earnings from holding Phoenix stock.](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2F71b6bb15-1370-49fa-ac78-78a7e9fc1fb4%2F86b12a61-7310-465d-bed9-a7d850320eab%2Fy3ftyj_processed.jpeg&w=3840&q=75)
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