(Related to Checkpoint 10.2) (Relative valuation of common stock) Using the P/E ratio approach to valuation, calculate the value of a share of stock under the following conditions: • the investor's required rate of return is 14 percent, • the expected level of earnings at the end of this year (E,) is $5, • the firm follows a policy of retaining 20 percent of its earnings, • the return on equity (ROE) is 15 percent, and • similar shares of stock sell at multiples of 7.272 times earnings per share. Now show that you get the same answer using the discounted dividend model. a. The stock price using the P/E ratio valuation method is $. (Round to the nearest cent.)

(Related to Checkpoint 10.2) (Relative valuation of common stock) Using the P/E ratio approach to valuation, calculate the value of a share of stock under the following conditions: • the investor's required rate of return is 14 percent, • the expected level of earnings at the end of this year (E,) is $5, • the firm follows a policy of retaining 20 percent of its earnings, • the return on equity (ROE) is 15 percent, and • similar shares of stock sell at multiples of 7.272 times earnings per share. Now show that you get the same answer using the discounted dividend model. a. The stock price using the P/E ratio valuation method is $. (Round to the nearest cent.)

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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Assume that a share of stock just paid (yesterday) a dividend (Do) of $2.00 per share, has a required rate of return of 6 percent, and has a constant dividend growth rate of 2 percent. Also assume that the stock's price is in equilibrium so that expected rates are equal to required rates of return. Given this information, determine what percentage of the stocks current price (value) is derived from the dividends expected to be received in Years 11-22. 23.48% 29.84% O 28.34% 26.79% 25.17%
Whispering Natural Foods' current dividend is $4.00. You expect the growth rate to be 0 percent for years 1 to 5 , and 1 percent for years 6 to infinity. The required rate of return on this firm's equity is 11 percent. Determine the expected dividend at the end of year 5 Determine the expected dividend at the end of year 6 . Determine the expected price of the stock at the end of year 5 (after the year 5 dividend) determine the price of the stock today
Diana Corporation anticipates a 10 percent growth in net income and dividends. Next year, the company expects earnings per share of P5 and dividends per share of P3. Diana will be having its first public issuance of common stock. The stock will be issued at P40 per share. REQUIREMENTS: 1. What is the P/E ratio? 2. What is the required rate of return on the stock?
An investor with a required return of 15 percent for very risky investments in common stock has analyzed three firms and must decide which, if any, to purchase. The information is as follows: Firm A B C Current earnings $ 2.40 $ 3.20 $ 7.50 Current dividend $ 0.90 $ 3.80 $ 6.90 Expected annual growth rate in 5 % 1 % -1 % dividends and earnings Current market price $ 16 $ 31 $ 49 What is the maximum price that the investor should pay for each stock based on the dividend-growth model? Round your answers to the nearest cent. Stock A: $ Stock B: $ Stock C: $ If the investor does buy stock A, what is the implied percentage return? Round your answer to two decimal places. % If the appropriate P/E ratio is 12, what is the maximum price the investor should pay for each stock? Round your answers to the nearest cent. Stock A: $ Stock B: $ Stock C: $ If the appropriate P/E ratio is 4, what is the maximum…
a) Company X is expected to pay an end-of-year dividend of $5.25 a share. After the dividend its stock is expected to sell at $350. If the market rate is 11.5% p.a., what is the current stock price? b) If the beta of a stock is 1.0, and financial analysts expect the market to grow 5% during the next year, will you expect the stock of Company X to rise or fall? Calculate by what percentage, on average, the stock price increases/decreases. Romanoff Company does not plan to pay any dividends until year 3. Financial managers expect the dividend in year three to be $2.65 and dividends in future years to grow at a constant rate of 4.5%. Calculate the value of the stock of Romanoff Company today if the firm's risk-adjusted required rate of return is 18% p.a.
Given the following information for the stock of Foster Company, calculate the risk premium on its common stock. Current price per share of common stock $47.02 Expected dividend per share next year $2.46 Constant annual dividend growth rate 5.9% Risk-free rate of return 3.9% The risk premium on Foster stock is ___%
Use the Dividend Discount Model to determine the expected annual growth rate of the dividend for ELO stock. The firm is expected to pay an annual divided of $3.07 per share in one year. ELO shares are currently trading for $27.81 on the NYSE, and the expected annual rate of return for ELO shares is 16.58%. Answer as a % to 2 decimal places (e.g., 12.34% as 12.34). Answer:
Boehm Incorporated is expected to pay a $2.70 per share dividend at the end of this year (i.e., D1 = $2.70). The dividend is expected to grow at a constant rate of 8% a year. The required rate of return on the stock, rs, is 16%. What is the estimated value per share of Boehm's stock? Do not round intermediate calculations. Round your answer to the nearest cent.
A stock is selling today for $50 per share. At the end of the year, it pays a dividend of $3 per share and sells for $59. Required: a. What is the total rate of return on the stock? b. What are the dividend yield and percentage capital gain? c. Now suppose the year-end stock price after the dividend is paid is $44. What are the dividend yield and percentage capital gain in this case?
If a stock's dividend is expected to grow at a constant rate of 5% a year, which of the following statements is correct? Select one: O a. O b. O c. The stock's dividend yield is 5%. The price of the stock is expected to decline in the future. The stock's required return must be equal to or less than 5%. Od. The stock's price one year from now is expected to be above the current price. e. The expected return on the stock is 5% a year.
(Common stock valuation) Assume the following: • the investor's required rate of return is 13.5 percent, • the expected level of earnings at the end of this year (E1) is $6, • the retention ratio is 40 percent, • the return on equity (ROE) is 15 percent (that is, it can earn 15 percent on reinvested earnings), and • similar shares of stock sell at multiples of 8.000 times earnings per share. Questions: a. Determine the expected growth rate for dividends. b. Determine the price earnings ratio (P/E1). c. What is the stock price using the P/E ratio valuation method? d. What is the stock price using the dividend discount model? e. What would happen to the P/E ratio (P/E1) and stock price if the company increased its retention rate to 75 percent (holding all else constant)? What would happen to the P/E ratio (P/E1) and stock price if the company paid out all its earnings in the form of dividends? f. What have you learned about…
What will be the value of a preferred stock that is continuously committed to pay a dividend of 3400 USD per year when the market interest rate is accepted as 35%?a) 10000b) 9000c) 7000d) 5500e) 8000 ============== The price / earnings ratio of ABC Enterprise's stock has been calculated as 3.5. If the expected earnings per share from this stock for the next year is 12 USD, what is the real value of the stock? a) 50b) 30c) 36d) 21e) 42 ================ It is estimated that entity A will have a net profit of 5.5 USD per share for the next year. The price / earnings ratio data of this stock for the past 4 years are calculated as 1.5, 2.5, 3, 2, respectively. Find the true value of the stock of Entity A based on the data.a) 6.5b) 12,375c) 4,375d) 10,375e) 9.5

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