5. Suppose Rick's Software Co. does not currently pay a dividend, but expects to begin paying a $3 dividend in 12 years and that dividends will grow by 9% every year thereafter. If your required return on Rick's Software stock is 16%, what would you be willing to pay for the stock? Hint: Po = D₂ D3 D₁ + (1+R)1 (1+R)2 (1+R)³3 + + +. Dt (1+R) + Pt (1+R) where P = Dex(1+8) Dt+1 R-g R-g
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.
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**13. Stock Valuation for Rick's Software Co.**
Rick's Software Co. does not currently pay a dividend but expects to begin paying a $3 dividend in 12 years, with dividends growing by 9% each year thereafter. If your required return on Rick's Software stock is 16%, what would you be willing to pay for the stock?
**Hint:**
\[ P_0 = \frac{D_1}{(1+R)^1} + \frac{D_2}{(1+R)^2} + \frac{D_3}{(1+R)^3} + \cdots + \frac{D_t}{(1+R)^t} + \frac{P_t}{(1+R)^t} \]
where \[ P_t = \frac{D_{t+1} \times (1+g)}{R-g} \]
**14. Stock Valuation for Metallica Bearings, Incorporated**
Metallica Bearings, Incorporated, is a young start-up company. No dividends will be paid on the stock over the next nine years because the firm needs to reinvest its earnings for growth. The company will pay a dividend of $10 per share 10 years from today and will increase the dividend by 4 percent per year thereafter. If the required return on this stock is 12.5 percent, what is the current share price?
**Hint:**
\[ P_0 = \frac{D_1}{(1+R_1)^1} + \frac{D_2}{(1+R)^2} + \frac{D_3}{(1+R)^3} + \cdots + \frac{D_t}{(1+R)^t} + \frac{P_t}{(1+R)^t} \]
where \[ P_t = \frac{D_{t+1} \times (1+g)}{R-g} \]
**15. Dividends for Lohn Corporation**
Lohn Corporation is expected to pay the following dividends over the next four years: $15, $18, $20, and $21. Thereafter, the company pledges to maintain a constant 6 percent growth rate in dividends forever. If the required return on the stock is 8.75 percent, what](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2Fb828d974-21a6-44e8-a19c-78b2b23452a3%2Ff6752c38-d5d1-42dd-a964-e8524db46a71%2Fcgkwvzi_processed.jpeg&w=3840&q=75)
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