Company Z-prime’s earnings and dividends per share are expected to grow by 3% a year. Its growth will stop after year 4. In year 5 and afterward, it will pay out all earnings as dividends. Assume next year’s dividend is $5, the market capitalization rate is 13% and next year’s EPS is $10. What is Z-prime’s stock price?
Company Z-prime’s earnings and dividends per share are expected to grow by 3% a year. Its growth will stop after year 4. In year 5 and afterward, it will pay out all earnings as dividends. Assume next year’s dividend is $5, the market capitalization rate is 13% and next year’s EPS is $10. What is Z-prime’s stock price?
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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Company Z-prime’s earnings and dividends per share are expected to grow by 3% a year. Its growth will stop after year 4. In year 5 and afterward, it will pay out all earnings as dividends. Assume next year’s dividend is $5, the market capitalization rate is 13% and next year’s EPS is $10. What is Z-prime’s stock price?
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Step 1: Introduction
The Dividend Discount Model (DDM) is a financial valuation approach used to estimate the intrinsic value of a company's stock based on its expected future dividend payments. It assumes that the present value of dividends received by investors is the primary driver of a stock's worth. By discounting projected future dividends back to their present value, DDM helps investors assess whether a stock is overvalued or undervalued and aids in making informed investment decisions
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