Assume you've generated the following information about the stock of Ben's Banana Splits: The company's latest dividends of $1.62 a share are expected to grow to $1.72 next year, to $1.82 the year after that, and to $1.93 in year 3. After that, you think dividends will grow at a constant 5% rate. a. Use the variable growth version of the dividend valuation model and a required return of 12% to find the value of the stock. b. Suppose you plan to hold the stock for three years, selling it immediately after receiving the $1.93 dividend. What is the stock's expected selling price at that time? As in part a, assume a required return of 12%. c. Imagine that you buy the stock today paying a price equal to the value that you calculated in part a. You hold the stock for three years, receiving dividends as described above. Immediately after receiving the third dividend, you sell the stock at the price calculated in part b. Use the IRR approach to calculate the expected return on the stock over three years. Could you have guessed what the answer would be before doing the calculation? d. Suppose the stock's current market price is actually $22.72. Based on your analysis from part a, is the stock overvalued or undervalued? e. A friend of yours agrees with your projections of Ben's Banana Splits future dividends, but he believes that in
Assume you've generated the following information about the stock of Ben's Banana Splits: The company's latest dividends of $1.62 a share are expected to grow to $1.72 next year, to $1.82 the year after that, and to $1.93 in year 3. After that, you think dividends will grow at a constant 5% rate. a. Use the variable growth version of the dividend valuation model and a required return of 12% to find the value of the stock. b. Suppose you plan to hold the stock for three years, selling it immediately after receiving the $1.93 dividend. What is the stock's expected selling price at that time? As in part a, assume a required return of 12%. c. Imagine that you buy the stock today paying a price equal to the value that you calculated in part a. You hold the stock for three years, receiving dividends as described above. Immediately after receiving the third dividend, you sell the stock at the price calculated in part b. Use the IRR approach to calculate the expected return on the stock over three years. Could you have guessed what the answer would be before doing the calculation? d. Suppose the stock's current market price is actually $22.72. Based on your analysis from part a, is the stock overvalued or undervalued? e. A friend of yours agrees with your projections of Ben's Banana Splits future dividends, but he believes that in
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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Concept explainers
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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Question
Transcribed Image Text:d. Suppose the stock's current market price is actually $22.72. Based on your analysis from part a, is the stock
overvalued or undervalued?
e. A friend of yours agrees with your projections of Ben's Banana Splits future dividends, but he believes that in
three years, just after the company pays the $1.93 dividend, the stock will be selling in the market for $55.10. Given
that belief, along with the stock's current market price from part d, calculate the return that your friend expects to
earn on the stock over the next three years.
nearest cent.)
c. Using the IRR approach, the expected return on the stock over three years is%. (Round to the nearest
whole percent.)
d. If the stock's current market price is actually $22.72, then the stock is
the drop-down menu.)
(Select from
e. The return that your friend expects to earn on the stock over the next three years is%. (Round to the nearest
whole percent.)
Transcribed Image Text:Assume you've generated the following information about the stock of Ben's Banana Splits: The company's latest
dividends of $1.62 a share are expected to grow to $1.72 next year, to $1.82 the year after that, and to $1.93 in
year 3. After that, you think dividends will grow at a constant 5% rate.
a. Use the variable growth version of the dividend valuation model and a required return of 12% to find the value of
the stock.
b. Suppose you plan to hold the stock for three years, selling it immediately after receiving the $1.93 dividend.
What is the stock's expected selling price at that time? As in part a, assume a required return of 12%.
c. Imagine that you buy the stock today paying a price equal to the value that you calculated in part a. You hold the
stock for three years, receiving dividends as described above. Immediately after receiving the third dividend, you
sell the stock at the price calculated in part b. Use the IRR approach to calculate the expected return on the stock
over three years. Could you have guessed what the answer would be before doing the calculation?
d. Suppose the stock's current market price is actually $22.72. Based on your analysis from part a, is the stock
overvalued or undervalued?
e. A friend of yours agrees with your projections of Ben's Banana Splits future dividends, but he believes that in
a. Using the variable growth version of the dividend valuation model and a required return of 12%, the value of the
stock is $. (Round to the nearest cent.)
b. The stock's expected selling price immediately after receiving the $1.93 dividend is $. (Round to the
nearest cent.)
c. Using the IRR approach, the expected return on the stock over three years is%. (Round to the nearest
whole percent.)
d. If the stock's current market price is actually $22.72, then the stock is
(Select from
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