In practice, a common way to value a share of stock when a company pays dividends isto value the dividends over the next five years or so, then find the terminal stock priceusing a benchmark PE ratio. Suppose a company just paid a dividend of $2.00. Thedividends are expected to grow at 13 percent over the next five years. In five years, theestimated payout ratio is 25 percent and the benchmark PE ratio is 38.a. What is the target stock price in five years? (Do not round intermediate calculationsand round your answer to 2 decimal places, e.g., 32.16.)b. What is the stock price today assuming a required return of 14 percent on this stock?(Do not round intermediate calculations and round your answer to 2 decimalplaces, e.g., 32.16.)a. Stock price in 5 yearsb. Stock price today

Price of the stock today is the PV of all future dividends and horizon value discounted at the…

Answered: a. Stock price in 5 years b. Stock…

Business

Finance

a. Stock price in 5 years b. Stock price today

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

Problem 1PS

See similar textbooks

Related questions

Q: A certian stock pays dividends continuously at a rate of 6 per year. The current price of the stock…

A: Current stock price = S Dividend yield rate = δ r = Risk free rate F = Forward price n = Duration

Q: In the cell , by using cell references to the given data, calculate the value of stock A. Stock A…

A: Next dividend (D1) = $1.20 Growth rate (g) = 8% Required return (r) = 13%

Q: In the cell , by using cell references to the given data, calculate the value of stock E. Stock E…

A: Let stock E's price be S. Next year dividend = $2.25 Growth rate = 8% Return required = 20%

Q: The following table shows your stock positions at the beginning of the year, the dividends that each…

A: Portfolio return is the total gain or loss on an investment portfolio over a specified period of…

Q: Stock value using PS ratio to estimate selling price An investor is going to buy stock, collect…

A: The objective of the question is to determine the maximum price the investor should be willing to…

Q: ou bought a stock on 1 January 2018 for $135.5 and below are the year-end price data and annual…

A: The stock price at the beginning = $135.5 Standard deviation is computed by computing the return…

Q: n the cell, by using cell references to the given data, calculate the value of stock B. Stock B…

A: D1 = $4 Let dividend growth rate = g and required return = Re g = 5% Re = 15%

Q: If you purchase a stock today for $100 and plan to sell in 7 years at an average return of 7.6% what…

A: The objective of the question is to calculate the future value of an investment. In this case, we…

Q: EPS Dividend Yield Formule 2022 2021 2020 $6.74 $6.08 $3.74 0,72% 0,5% 0,7%

A: Based on the given data, Apple's EPS has been increasing steadily over the last three years, from…

Q: Calculate the value of common stock given: Expected Dividend Year 1 (D1) is $20; Capitalization Rate…

A: As per Gordons growth model, P = D1 / (Ke-g) P = stock price D1 = value of next…

Q: What is needed to find the value of common stock? The most recent dividend (or the…

A: According to Gordon's Growth model ,P = where,P = value of common stockDo = current year dividendg…

Q: You buy a share of The Ludwig Corporation stock for $22.90. You expect it to pay dividends of $1.05,…

A: 1). The growth rate in dividend is calculated using following compounded average growth rate…

Q: Given the following information for the stock of Foster Company, calculate the risk premium on its…

A: Cost of common stock is computed using the dividend growth model and the capital asset pricing model…

Q: You have purchased stock A when it is $4 and sold it at $5. What is your holding period return?

A: Purchase price = $ 4 Sale price = $ 5

Q: 1. A stock had the following prices and dividends. What is the geometric average return on this…

A: Returns of the stock refer to the income earned by holding the stock for a defined period of time,…

Q: In the cell, by using cell references to the given data, calculate the value of stock D. Stock D…

A: Expected dividend next year = D = $6 Growth rate = g = 8% Required return = Re = 9%

Q: Preferred Stock Rate of Return Nick's Enchiladas has preferred stock outstanding that pays a…

A: Preferred Stock refers to the type of stock that possess the features of both equities and debt. It…

Q: You have found the following historical information for DEF Company: Stock Price Year1 Year 2 EPS…

A: calculating year by year P/E ratios

Q: preferred stock valuation farley inc, has perpetual stock outstanding that sells for $30 a share and…

A: Required rate of return = Annual Dividend / Price

Q: The stocks on ABC Company and XYZ Company have the following returns over the last five years. Year…

A: Average return = sum of all returns / no. of observations

Q: h list point(s) possible K You are interested in purchasing a common company's stock. The stock is…

A: Current price of stock is the price which can be paid for purchase of the stock. It is also called…

Q: Calculate the value of the stock when the next year earnings, E1 = 8.7, earnings growth multiplier,…

A: We need to use constant growth model to calculate value of stock P0 =D1/(rs-g) where P0 =value of…

Q: A preferred share of stock pays dividends of $80 per year, and the required rate of return for the…

A: The formula used is shown:

Q: Assuming constant growth in dividends, the price of a stock at year 3 can be expressed as: 1) D₁ x…

A: According to Gordon's grwoth model ,Po =wherePo = Stock price for year 0 D1 = Expected dividend for…

Q: Assume that you own a share of stock that has achieved the following historical returns: Year 1 7%…

A: Average rate of return is the expected rate of return from a particular stock. It is the ratio of…

Q: A stock has had the following year-end prices and dividends: Year Price Dividend 1 $ 64.78 — 2…

A: Year Price Dividend 1 $ 64.78 2 $ 71.65 $ 0.69 3 $ 77.45 $ 0.74 4 $ 63.72…

Q: What is the annual rate of return for this stock - 1/1 beginning price $35, 12/31 ending price $40,…

A: Begining price on 1/1 is $35 Eniding price on 12/31 is $40 Quaterly Dividend is of $0.5 To Find:…

Q: onsider the following information on large-company stocks for a period of years. Arithmetic Mean…

A: Arithmetic Mean =12.3%Inflation rate-3.6%Required:Arithmetic average annual return in nominal…

Q: 1. You are given the following information for a stock that has a lognormal distribution: • The…

A: We have the median stock price for 1 year and 5 years. We have to find the median stock price for…

Q: The following table shows your stock positions at the beginning of the year, the dividends that each…

Q: You own a stock trading on 1/1 at 40 and on 12/31 at 43.50. What annual dividend do you need to earn…

A: Beginning stock price (P0) = 40 Ending stock price (P1) = 43.50 Let the annual dividend = D Required…

Q: You buy a share of The Ludwig Corporation stock for $19.60. You expect it to pay dividends of $1.02,…

A: a. Growth Rate = (Dividend, Year 3 / Dividend, Year 1)(1 /n) - 1.where n = no. of periods = 2…

Q: Annual returns of Stock in the past 5 years are presented in the following table: Year 1 Year 2…

A: The standard deviation quantifies the degree of deviation from the expected return, It is an…

Q: Dividend per share per period dividends passed $5.10 Periods of Par value Туре Cumulative Case $60…

A: Preferred dividend are the dividends paid to preference shareholders in exchange of preference…

Q: The following table shows your stock positions at the beginning of the year, the dividends that each…

A: Portfolio ReturnDollar return$2,768 Percentage return6.72%Explanation:Step 1:Working Notes:…

Q: The following table shows your stock positions at the beginning of the year, the dividends that each…

A: Portfolio is the combination of debt, equity and mixed securities which is being purchased for the…

Q: Solve dividends EPS and stock prices using the information that follows. Bravo Company just paid a…

A: D01.18Growth rate13%Benchmark PE20Payout ratio45%Required rate of return13%

Q: NWG.L History Daily 11-Mar-2019-11-Mar-2020 Exchange Date 11-Mar-2020 10-Mar-2020 09-Mar-2020…

A: To calculate how much you gained or lost per day for a stock, subtract the opening price from the…

Q: Preferred Stock Rate of Return Nick's Enchiladas has preferred stock outstanding that pays a…

A: Preferred stocks are those stocks that have a preferential right over the common stock holders. The…

Q: In the cell, by using cell references to the given data, calculate the value of stock C. Stock C…

A: Next dividend = $0.65 Growth rate = 10% Required return = 14% Let stock's value = P

Q: Nick's Enchiladas has preferred stock outstanding that pays a dividend of $3 at the end of each…

A: A fixed rate of dividend is guaranteed to preferred shareholders. Although there is no legal…

Q: A share is expected to pay a dividend of 750 next year. The real value of diviended payments is…

A: Stock price can be calculated by using constant growth model. The equation under this model is given…

Q: You bought a stock on 1 January 2018 for $135.5 and below are the year-end price data and annual…

A: Given: Date Closing price Annual dividend 31-Dec-17 $135.50 $3.60 31-Dec-18 $138.20 $3.65…

Q: Exam Financial Markets stor expects to purchase common stocks today and sell them after t has…

A: As per Dividend discount Model, Intrinsic Value = [D1/(1+ Ke)1] + [D2/(1+ Ke)2] + [D3/(1+ Ke)3] + […

Question

In practice, a common way to value a share of stock when a company pays dividends is
to value the dividends over the next five years or so, then find the terminal stock price
using a benchmark PE ratio. Suppose a company just paid a dividend of $2.00. The
dividends are expected to grow at 13 percent over the next five years. In five years, the
estimated payout ratio is 25 percent and the benchmark PE ratio is 38.
a. What is the target stock price in five years? (Do not round intermediate calculations
and round your answer to 2 decimal places, e.g., 32.16.)
b. What is the stock price today assuming a required return of 14 percent on this stock?
(Do not round intermediate calculations and round your answer to 2 decimal
places, e.g., 32.16.)
a. Stock price in 5 years
b. Stock price today

Expert Solution

This question has been solved!

Explore an expertly crafted, step-by-step solution for a thorough understanding of key concepts.

This is a popular solution!

SEE SOLUTION Check out a sample Q&A here

Step 1: Introduction

VIEW

Step 2: Computation

VIEW

Solution

VIEW

Trending now

This is a popular solution!

Step by step

Solved in 3 steps with 3 images

SEE SOLUTION Check out a sample Q&A here

Knowledge Booster

Learn more about

Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, finance and related others by exploring similar questions and additional content below.

Similar questions

Consider a stock that will pay out a dividends over the next 3 years of $1.4, $1.9, and $2.4, respectively. The price of the stock will be $51.81 at time 3. The interest rate is 13%. What is the current price of the stock? Enter your response below rounded to 2 DECIMAL PLACES.
Question 4: The last dividend paid by ABC company is 5 TL. The dividend is expected to grow next years by 49%, 6%, 3% 4% and 2% in the following years. If the expected return rate of investors (k) is 10%. a) what is the value of this stock today (PO)? b) What will the stock price be 10 years from today?
Return on Common Stock You buy a share of The Ludwig Corporation stock for $18.50. You expect it to pay dividends of $1.00, $1.0510, and $1.1046 in Years 1, 2, and 3, respectively, and you expect to sell it at a price of $21.48 at the end of 3 years. Calculate the growth rate in dividends. Round your answer to two decimal places. % Calculate the expected dividend yield. Round your answer to two decimal places. % Assuming that the calculated growth rate is expected to continue, you can add the dividend yield to the expected growth rate to obtain the expected total rate of return. What is this stock's expected total rate of return (assume market is in equilibrium with the required rate of return equal to the expected return)? Do not round intermediate calculations. Round your answer to two decimal places. %
A stock is selling today for $50 per share. At the end of the year, it pays a dividend of $3 per share and sells for $59. Required: a. What is the total rate of return on the stock? b. What are the dividend yield and percentage capital gain? c. Now suppose the year-end stock price after the dividend is paid is $44. What are the dividend yield and percentage capital gain in this case?
6- A share of stock will pay a dividend of $25 in one year, and will be sold for an expected price of $500 at that time. If the current one-year interest rate is 5%, what will be the current price of the stock?
title: principle of investmentSuppose the dividend of a stock today is 6%. The interest rate is 5% and that dividends will grow forever at the rate of 4%. What is the fundamental value (present value) of this stock? If the current market price of this is 500, should you buy or sell the stock?
What is the SD for a stock that has annual returns for 4 years 6%,-4%,8% and -12%? 9.0 9.3 9.6 8.3 8.7
Return on Common Stock You buy a share of The Ludwig Corporation stock for $21.00. You expect it to pay dividends of $1.09, $1.1772, and $1.2714 in Years 1, 2, and 3, respectively, and you expect to sell it at a price of $26.45 at the end of 3 years. Calculate the growth rate in dividends. Round your answer to two decimal places. % Calculate the expected dividend yield. Round your answer to two decimal places. % Assuming that the calculated growth rate is expected to continue, you can add the dividend yield to the expected growth rate to obtain the expected total rate of return. What is this stock's expected total rate of return (assume market is in equilibrium with the required rate of return equal to the expected return)? Do not round intermediate calculations. Round your answer to two decimal places. %
If the annual volatility of a stock's annual returns is 35% per year and if the stock has a price of $77, the monthly volatility of that same stock's monthly price changes should approximately be: a. $224.58 b. $7.78 c. $26.95 d. $32.24
4. Expected dividends as a basis for stock values The following graph shows the value of a stock’s dividends over time. The stock’s current dividend is $1.00 per share, and dividends are expected to grow at a constant rate of 2.70% per year. The intrinsic value of a stock should equal the sum of the present value (PV) of all of the dividends that a stock is supposed to pay in the future, but many people find it difficult to imagine adding up an infinite number of dividends. Calculate the present value (PV) of the dividend paid today (D₀) and the discounted value of the dividends expected to be paid 10, 20, and 50 years from now (D10, D20, D50D10, D20, D50). Assume that the stock’s required return (rss) is 8.40%. Note: Carry and round the calculations to four decimal places. Time Period Dividend’s Expected Future Value Dividend’s Expected Present Value Now End of Year 10 End of Year 20 End of Year 50 Using the orange…
An investor receives an 15 percent total return by purchasing a stock and selling it after one year with a 10 percent capital gain. The dividend income during the year is $4. What is the price of the stock currently?
Return on Common Stock You buy a share of The Ludwig Corporation stock for $18.40. You expect it to pay dividends of $1.08, $1.1491, and $1.2226 in Years 1, 2, and 3, respectively, and you expect to sell it at a price of $22.16 at the end of 3 years. a. Calculate the growth rate in dividends. Round your answer to two decimal places. % b. Calculate the expected dividend yield. Round your answer to two decimal places. % c. Assuming that the calculated growth rate is expected to continue, you can add the dividend yield to the expected growth rate to obtain the expected total rate of return. What is this stock's expected total rate of return? (Assume the market is in equilibrium with the required return equal to the expected return.) Do not round intermediate calculations. Round your answer to two decimal places. %

SEE MORE QUESTIONS

Recommended textbooks for you

Essentials Of Investments

Finance

ISBN:

9781260013924

Author:

Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:

Mcgraw-hill Education,

FUNDAMENTALS OF CORPORATE FINANCE

Finance

ISBN:

9781260013962

Author:

BREALEY

Publisher:

RENT MCG

Financial Management: Theory & Practice

Finance

ISBN:

9781337909730

Author:

Brigham

Publisher:

Cengage

Foundations Of Finance

Finance

ISBN:

9780134897264

Author:

KEOWN, Arthur J., Martin, John D., PETTY, J. William

Publisher:

Pearson,

Fundamentals of Financial Management (MindTap Cou…

Finance

ISBN:

9781337395250

Author:

Eugene F. Brigham, Joel F. Houston

Publisher:

Cengage Learning

Corporate Finance (The Mcgraw-hill/Irwin Series i…

Finance

ISBN:

9780077861759

Author:

Stephen A. Ross Franco Modigliani Professor of Financial Economics Professor, Randolph W Westerfield Robert R. Dockson Deans Chair in Bus. Admin., Jeffrey Jaffe, Bradford D Jordan Professor

Publisher:

McGraw-Hill Education

Essentials Of Investments

Finance

ISBN:

9781260013924

Author:

Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:

Mcgraw-hill Education,

FUNDAMENTALS OF CORPORATE FINANCE

Finance

ISBN:

9781260013962

Author:

BREALEY

Publisher:

RENT MCG

Financial Management: Theory & Practice

Finance

ISBN:

9781337909730

Author:

Brigham

Publisher:

Cengage

Foundations Of Finance

Finance

ISBN:

9780134897264

Author:

KEOWN, Arthur J., Martin, John D., PETTY, J. William

Publisher:

Pearson,

Fundamentals of Financial Management (MindTap Cou…

Finance

ISBN:

9781337395250

Author:

Eugene F. Brigham, Joel F. Houston

Publisher:

Cengage Learning

Corporate Finance (The Mcgraw-hill/Irwin Series i…

Finance

ISBN:

9780077861759

Author:

Stephen A. Ross Franco Modigliani Professor of Financial Economics Professor, Randolph W Westerfield Robert R. Dockson Deans Chair in Bus. Admin., Jeffrey Jaffe, Bradford D Jordan Professor

Publisher:

McGraw-Hill Education

SEE MORE TEXTBOOKS