Problem 4-18 Two-stage DCF modelConsider the following three stocks:a. Stock A is expected to provide a dividend of $11.80 a share forever.b. Stock B is expected to pay a dividend of $6.80 next year. Thereafter, dividend growth is expected to be 3.00% a year forever.c. Stock C is expected to pay a dividend of $4.20 next year. Thereafter, dividend growth is expected to be 19.00% a year for five years(i.e., years 2 through 6) and zero thereafter.a-1. If the market capitalization rate for each stock is 9.00%, what is the stock price for each of the stocks? (Do not round intermediatecalculations. Round your answers to 2 decimal places.)Stock PriceStock AStock BStock Ca-2. Which stock is the most valuable?O Stock CO Stock BStock Ab-1. If the market capitalization rate for each stock is 6.00%, what is the stock price for each of the stocks? (Do not round intermediatecalculations. Round your answers to 2 decimal places.)Stock PriceStock AStock BStock C b-1. If the market capitalization rate for each stock is 6.00%, what is the stock price for each of the stocks? (Do not round intermediatecalculations. Round your answers to 2 decimal places.)Stock PriceStock AStock BStock Cb-2. Which stock is the most valuable?Stock AStock BO Stock C

Stock A: Dividend = 11.80 per share forever Stock B: Dividend next year = 6.80 Dividend growth =…

Answered: Problem 4-18 Two-stage DCF model…

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

Similar questions

14 see picture
Excel Online Structured Activity: Constant growth You are considering an investment in Justus Corporation's stock, which is expected to pay a dividend of $2.25 a share at the end of the year (D₁ = $2.25) and has a beta of 0.9. The risk-free rate is 3.9%, and the market risk premium is 5.0%. Justus currently sells for $43.00 a share, and its dividend is expected to grow at some constant rate, g. The data has been collected in the Microsoft Excel Online file below. Open the spreadsheet and perform the required analysis to answer the question below. ☑ Open spreadsheet Assuming the market is in equilibrium, what does the market believe will be the stock price at the end of 3 years? (That is, what is P3?) Round your answer to two decimal places. Do not round your intermediate calculations.
Question 1 Sisters Corp. pays a current (annual) dividend of $5, and dividends thereafter are expected to grow at the constant rate of 5% per year. The risk-free rate is 5%, and the expected return on the market portfolio is 15%. The stock has a beta of 0.50. The two competitors of Sisters Corp. are Brothers Corp. and Daughters Corp.. Brothers Corp. has a stock price of $80.00 and the earnings per share (EPS) of $5.00. Daughters Corp. has a stock price of $60.00 and the earnings per share (EPS) of $3.00. Sisters Corp. has expected EPS of $6 next year. Required: a) What is the market capitalization rate of the stock of Sisters Corp. (i.e., the expected return on this share)? b) What is the intrinsic value of the stock of Sisters Corp. using dividend discount model? What recommendation (buy, sell, hold) would you make to the investors? c) What is the intrinsic value of the stock of Sisters Corp. using price to earnings ratios model? What recommendation (buy, sell, hold) would you make to…
QUESTION 3 Current Price Beta Market Risk Premium $50 1.5 5.52% Expected Price in 1 year Expected Dividend T-year T Bond yield What is the stock's alpha? Convert to a percent and then use 2 decimal places. $56.04 $1.94 0.679% QUESTION 4 A mature company will pay a dividend of $3.82 next year and those dividends are expected to grow at 1.78% forever. If the required return is 11.18%, what is the fair value of the stock today?
Question 1 The firm is expected to pay a dividend of $0.50 forever starting from the third year. If the required return is 10 percent, what is this stock worth today? O4.13 3.42 O 3.76
Q1
Constant Growth DDM A stock just paid a dividend of $0.90 per share. Dividends are expected to grow at a constant rate of 7% per year forever. Investors expect and require a 11% return on this investment. The intrinsic value of this stock is a) $24.08 b) $23.52 c) $23.83 d) $23.63
#8 investment Melissa Cutt is thinking about buying some shares of EZLawn Equipment, at $47.67 per share. She expects the price of the stock to rise to $57.84 over the next 3 years. During that time she also expects to receive annual dividends of $4.93 per share. a. What is the intrinsic worth of this stock, given a required rate of return of 11%? b. What is its expected return?
Question one The rate of return on Treasury Bills (a risk free asset) is 5% p.a. over the next three months. The expected rate of return on the FT All Share Index portfolio over the same period is 8% p.a. An investment trust portfolio has a beta of 1.2 and an expected rate of dividend yield of 4% p.a. What might be the expected rate of capital growth of the investment trust portfolio? Question two The rate of return on treasury bills (a risk free asset) is 4% p.a. The expected retun on the FT All Share index portfolio is 9% p.a. Stocks A and B both have anticipated (forecast) returns of 10% p.a. and a price of 100p. Stock A has a beta of 0.8 and stock B has a beta of 1.7. Are these shares mispriced? If so, should they be bought or sold? Question three The share price of a company is 200p. Its expected next dividend is 5p. The dividend (and share price) growth rate is expected to be 4% p.a. The risk-free interest rate is 4.5% p.a. The share has a beta of 1.2 and the expected rate of…
Select the best Question 24 Reddick Enterprises' stock currently sells for $35.50 per share. The dividend is projected to increase at a constant rate of 5.50% per year. The required rate of return on the stock (I/Yr) is 9.00%. What is the stock's expected dividend in 3 years (Div3)? O 146 O 224 O 1.76 O 2.00 O 1.24
QUESTION ELEVENConsider four different stocks, all of which have a required return of 18 percent and a most recent dividend of K4.50 per share. Stocks W, X, and Y are expected to maintain constant growth rates in dividends for the foreseeable future of 10 percent, 0 percent, and 5 percent per year, respectively. Stock Z is a growth stock that will increase its dividend by 20 percent for the next two years and then maintain a constant 12 percent growth rate thereafter. What is the dividend yield for each of these four stocks? What is the expected capital gains yield? Discuss the relationship among the various returns that you find for each of these stocks.
2

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

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