The VSE Corporation currently pays no dividend because of depressed earnings. A recent change in management promises a brighter future. Investors expect VSE to pay a dividend of $1.5 next year (the end of year 1). This dividend is expected to increase to $2.75 the following year and to grow at a rate of 13 percent per annum for the following 2 years (years 3 and 4). Chuck Brown, a new investor, expects the price of the stock to increase 55 percent in value between now (time zero) and the end of year 3. If Brown plans to hold the stock for 2 years and requires a rate of return of 17 percent on his investment, what value would he place on the stock today? Use Table II to answer the question. Do not round intermediate calculations. Round your answer to the nearest cent. $ ?
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.
The VSE Corporation currently pays no dividend because of depressed earnings. A recent change in management promises a brighter future. Investors expect VSE to pay a dividend of $1.5 next year (the end of year 1). This dividend is expected to increase to $2.75 the following year and to grow at a rate of 13 percent per annum for the following 2 years (years 3 and 4). Chuck Brown, a new investor, expects the price of the stock to increase 55 percent in value between now (time zero) and the end of year 3. If Brown plans to hold the stock for 2 years and requires a
![TABLE II
Present Value Interest Factor (PVIF) (S1 at i % per period for n periods):
PVIF =
(1+
PV = FV,(PVIF,a)
Period, n
1%
1.000
3%
1.000 1.000
0.980 0.971
2%
4%
1.000
0.962
5%
1.000
6%
7%
8%
9%
10%
1.000
11%
1.000
12%
13%
1.000
0.943
1.000
0.935
1.000
0.926
0.857
0.794
1.000
0.917
1.000
0.893
0.797
0.712
0.636
1.000
0.885
0.990
0.980
0.971
0.952
0.909
0.901
0.961 0.943
0.942 0.915
0.907
0.864
0.812
0.731
0.659
0.593
0.783
0.693
0.613
0.543
0925
0.890
0.873
0.816
0.842
0.826
0.751
3
0.889
0.855
0.772
0.708
0.650
0.596
0.47
0.502
0.840
0.924 0.889
0.906 0.863
0.823
0.784
0.746
4
0.792
0.961
0.951
0.763
0.735
0.681
0.683
0.822
0.790
0.760
0.731
0.703
0.676
0.650
0.747
0.713
0.666
0.623
0.621
0.564
0.513
0567
0.507
0.452
0.888 0.838
0.871 0.813
0.853 0.789
0.837 0.766
0.705
0.665
0.627
0.592
0.58
0.527
0.497
0.469
0.442
0.417
0.535
0.482
0.434
0.480
0.425
0.942
0.630
0.933
0.923
0.914
O.583
0.540
0.711
0.677
0.582
0.544
0.467
0.404
0.376
033
0.295
0.261
0.645
10
11
0.508
0.475
0.500
0.463
0.460
0.422
0.424
0.386
0.350
0.391
0.352
0.317
0.361
0.322
0.905
0.820 0.744
0.804 0.722
0.614
0.896
0.887
0.585
0.557
0.429
0.397
0.388
0.287
0.257
0.229
0.205
0.183
0.788 0.701
0.773 0.681
0.286
0.258
0.232
0.209
0.231
0.204
0.181
12
13
0.625
0.601
0.444
0.356
0.319
0.879
0.530
0.758 0.661
0.743 0.642
0577
0.555
0534
0.415
0.388
0.362
0.368
0.340
0.326
0.299
0.290
0.263
0.239
0.505
0.481
14
0.870
15
0.315
0.292
0275
0.252
0.160
0.141
0.861
0.218
0.198
0.180
0.164
0.188
0.170
0.153
0.138
0.124
0.853
16
17
0.728 0.623
0.714 0.605
0.700 0.587
0.458
0.436
0.416
0.394
0.371
0.339
0.163
0.844
0513
0.494
0.317
0.270
0.250
0.231
0.212
0.296
0.276
0.258
0.197
0.146
0.130
0.116
0.104
0.066
0.125
0.111
0.098
0.087
18
19
0.836
0.350
0.331
0.828
0.820
0.686 0.570
0.673 0554
0.622 0.492
0.396
0.377
0310
0232
0.215
0.194
0.178
0.126
0.475
20
24
0.456
0.312
0.149
0.788
0.780
0.390
0.375
0.308
0.295
0.231
0.142
0.247
0.233
0.174
0.158
0.146
0.102
0.092
0.057
0.082
0.074
0.044
0.053
0.047
25
30
0.610 0.478
0.552 0.412
0.184
0.116
0.059
0.742
0.672
0.131
0.067
0.034
0.099
0.046
0.075
0.032
0.026
0.008
0.033
0.453 0.307
0.372 0.228
0.305 0.170
0.208
0.141
0.097
0.054
0.030
40
0.022
0.015
0.011
50
0.608
0.550
0.087
0.021
0.010
0013
0.006
0.009
0.003
0.005
0.002
0.003
0.001
0.002
0.001
60
0.095
0.054
0.017
Period n
17%
24%
14%
15%
16%
1.000
0.862
18%
19%
20%
1.000
0.833
28%
1.000
0.781
32%
36%
40%
1.000
0.877
1.000
0.870
1.000
1.000
0.847
1.000
0.840
1.000
1.000
1.000
0.735
1.000
0.714
0.806
0.758
0.769
0.675
0.855
0.731
0.624
0.756
0.658
0.572
0.497
0.743
0.641
0.718
0.706
0.694
0.579
0.650
0.524
0.610
0.477
0574
0.41
0.398
0.510
0.364
0.435
0.592
0.519
0.609
0.516
0.437
0.593
0.499
0.419
0552
0.534
0.482
0.402
0.423
0.341
0.373
0.291
0.329
0.250
0292
0215
0.260
0.186
0.476
0.456
0.400
0.432
0.376
0410
0.354
0.456
0.390
0.333
0.158
0.116
0.370
0.314
0.266
0.225
0.191
0352
0.296
0.335
0.279
0.275
0.222
0227
0.178
0.189
0.143
0.133
0.095
0.068
0.048
0.351
0.308
0.327
0.284
0.305
0.263
0.285
0.243
0.208
0.178
0.152
0.130
0.249
0.209
0.233
0.194
0.179
0.144
0.139
0.108
0.085
0.063
0.108
0.085
0.066
0.082
0.062
0.047
0227
0.195
0.168
0.176
0.148
0.124
0.104
0.046
0.034
0.025
0.018
0.270
0.237
0.247
0.162
0.135
0.116
0.094
0.035
0.025
11
0.215
0.187
0.162
0.137
0.116
0.099
12
13
0.208
0.112
0.093
0.076
0.061
0.052
0.040
0.036
0.018
0.013
14
15
0.182
0.160
0.140
0.163
0.141
0.123
0.145
0.125
0.108
0.027
0.021
0.016
0.111
0.088
0.074
0.078
0.065
0.049
0.040
0.032
0.025
0.014
0.010
0.009
0.006
0.095
0.084
0.071
16
17
0.123
0.108
0.107
0.093
0.093
0.080
0.081
0.069
0.062
0.052
0.054
0.045
0.032
0.019
0.015
0.012
0.009
0.007
0.005
0.003
0.005
0.060
0.051
0.026
0.021
0.017
0.044
0.037
0.031
0.015
18
19
0.095
0.081
0.069
0.060
0.059
0.051
0.038
0.031
0.012
0.009
0.007
0.004
0.002
20
24
0.083
0.073
0.043
0.070
0.061
0.035
0.051
0.028
0.043
0.023
0.043
0.037
0.019
0.026
0.013
0.014
0.006
0.007
0.003
0.005
0.004
0.001
0.003
0.002
0.001
0.002
0.001
0.000
0.000
25
30
0.038
0.020
0.030
0.015
0.024
0.012
0.020
0.009
0.016
0.007
0.001
0.013
0.005
0.010
0.004
0.005
0.002
0.002
0.001
0.001
0.000
0.000
40
50
0.005
0.001
0.004
0.001
0.003
0.001
0.001
0.000
0.000
0.000
0.000
0.000
0.000
0.000
0.002
0.001
0.000
0.000
0.000
0.000
0.000
0.000
0.000
0.000
0.000
0.000
0.000
0.000
60
0.000
0.000
0.000
0.000
0.000
0.000
0.000
0.000
0.000
23
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