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

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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

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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

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What is the most you should be willing to pay for the stock in the table? Expected Expected Price in 1Dividend in 1 year Required Current Return Price Year $376.29 $3.91 5.80% $89.00
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Question 1 The following are the monthly rates of returns for two stocks, Stock A and Stock B over 2022. Month 1 2 3 4 5 6 7 8 9 10 11 12 Stock A 2.52% -3.2% 0.54% 1.32% 2.56% 1.10% 1.85% 0.58% 1.98% 0.05% 1.15% 2.23% Stock B 1.37% Page 3 of 5 1.58% 0.98% -0.78% 0.98% 1.35% -2.04% 0.87% 2.09% -0.07% 1.78% 0.63% (a) What is the average monthly rate of return for each stock? What is the standard deviation of returns for each stock? (b) Calculate the covariance between the rates of return. Calculate the correlation coefficient between the rates of return. ortfolio Analysis (c) Comment on the diversification benefits of constructing a portfolio of these two stocks.
A stock had the following year-end prices and dividends: Year 0 1 23 Multiple Choice O Price $ 60.55 72.46 62.98 73.50 What was the arithmetic average return for the stock? O O 12.61% 10.09% Dividend 9.02% $ 1.29 1.63 1.64
OS DIVIDENDS ($) Time Period Now End of Year 10 End of Year 20 End of Year 50 Expected Dividend's Future Value Present Value Using the orange curve (square symbols), plot the present value of each of the expected future dividends for years 10, 20, and 50. The resulting curve will illustrate how the PV of a particular dividend payment will decrease depending on how far from today the dividend is expected to be received. Note: Round each of the discounted values of the of dividends to the nearest tenth decimal place before plotting it on the graph. (Tool tip: Mouse over the points in the graph to see their coordinates.) 6.00 FV of Dividends 5.00 Discounted Dividends 4.00 3.00 2.00 1.00 0 0 10 20 20 PV of Dividends 30 40 50 60 YEARS
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