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

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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?
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#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…
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2
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REVIEW AND SELF-TEST PROBLEMS 12.1 Calculating the Cost of Equity Suppose stock in Boone Corporation has a beta of .90. The market risk premium is 7 percent, and the risk-free rate is 8 percent. Boone's last dividend was $1.80 per share, and the dividend is expected to grow at 7 percent indefinitely. The stock currently sells for $25. What is Boone's cost of equity capital? (See Problem 1.)

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