Assume you are considering a stock which oddly pays a dividend at the end of each year. Your required rate of return is 8.5%. The expected dividend at the end of year 1 is $5.50. In year 2, the dividend is expected to grow by 11%. The year after that, the dividend is expected to be up 12%. In year 4 and 5 it is expected to grow at 15%. (1) If your holding period for this stock is 5 years, what is the present value of dividends? (2) If stock price is currently $40 and is expected to go to $80 by year 5, what is the present value of the stock from the end of your holding period? (3) If as investor, you only want to purchase stocks when Mr. Market sells them at 60% of intrinsic value, then what is the most you will pay for this stock? Please show your work.
Assume you are considering a stock which oddly pays a dividend at the end of each year. Your required rate of return is 8.5%. The expected dividend at the end of year 1 is $5.50. In year 2, the dividend is expected to grow by 11%. The year after that, the dividend is expected to be up 12%. In year 4 and 5 it is expected to grow at 15%. (1) If your holding period for this stock is 5 years, what is the present value of dividends? (2) If stock price is currently $40 and is expected to go to $80 by year 5, what is the present value of the stock from the end of your holding period? (3) If as investor, you only want to purchase stocks when Mr. Market sells them at 60% of intrinsic value, then what is the most you will pay for this stock? Please show your work.
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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Transcribed Image Text:Assume you are considering a stock which oddly pays a dividend at the
end of each year. Your required rate of return is 8.5%. The expected
dividend at the end of year 1 is $5.50. In year 2, the dividend is expected to
grow by 11%. The year after that, the dividend is expected to be up 12%. In
year 4 and 5 it is expected to grow at 15%. (1) If your holding period for this
stock is 5 years, what is the present value of dividends? (2) If stock price is
currently $40 and is expected to go to $80 by year 5, what is the present
value of the stock from the end of your holding period? (3) If as investor,
you only want to purchase stocks when Mr. Market sells them at 60% of
intrinsic value, then what is the most you will pay for this stock? Please
show your work.
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