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Expected Dividend Yield Calculation

The document provides sample problems and solutions for stock valuation using the constant growth and Gordon growth models as well as non-constant growth models. It includes 8 sample problems calculating stock price based on given dividend amounts, growth rates, and required rates of return. The solutions show the calculations and equations used to determine the stock price under each scenario.

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Mary Yvonne Ares
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85 views4 pages

Expected Dividend Yield Calculation

The document provides sample problems and solutions for stock valuation using the constant growth and Gordon growth models as well as non-constant growth models. It includes 8 sample problems calculating stock price based on given dividend amounts, growth rates, and required rates of return. The solutions show the calculations and equations used to determine the stock price under each scenario.

Uploaded by

Mary Yvonne Ares
Copyright
© All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd

STOCK VALUATION

SAMPLE PROBLEMS with Solutions

Constant Growth/Gordon Growth Model

1. Sixthman Inc.’s most recent dividend was $2.40 per share. The dividend is expected
to grow at a rate of 6 percent per year. The rate of return is 10.2%, what is the price of
the stock today?

2. A stock is expected to pay a dividend of $0.50 at the end of the year. Its dividend is
expected to grow at a constant rate of 7 percent a year, and the stock has a required
return of 12 percent. What is the expected price of the stock four years from today?

3. If D0 = $2.25, g (which is constant) = 3.5%, and P0 = $50, what is the stock’s


expected dividend yield for the coming year?

4. If D1 = $1.50, g (which is constant) = 6.5%, and P0 = $56, what is the stock’s


expected capital gains yield for the coming year?

Nonconstant/Variable Growth

5. The last dividend paid by Nike Company was $1.00. Nike’s growth rate is expected to
be a constant 5 percent for 2 years, after which dividends are expected to grow at a rate
of 10 percent forever. Nike’s required rate of return on equity is 12 percent. What is the
current price of Nike’s common stock?

6. Your company paid a dividend of $2.00 last year. The growth rate is expected to be 4
percent for 1 year, 5 percent the next year, then 6 percent for the following year, and
then the growth rate is expected to be a constant 7 percent thereafter. The required rate
of return on equity is 10 percent. What is the current stock price?

7. Your company has recently paid a dividend of $2 last year. The expected growth rate
is 30% for the first three years before achieving long-run growth of 6%. The required
rate of return is 13%. What is the expected capital gains yield during the first year?
Round off PV factors and PV values to three decimal places.

8. A stock has recently paid a dividend of $2 last year. The expected growth rate is zero
for the first three years before achieving long-run growth of 6%. The required rate of
return is 13%. What is the expected dividend yield during the first year? Round off PV
factors and PV values to three decimal places.
Solution/ Answer Key:

1. D1 = $2.40 × 1.06 = $2.544.


P0 = $2.544/(0.102 - 0.06) = $60.57. 7

2.
The price today,
𝑃0= $0.50 / (.12− .07)=$10.00
Since this is a constant growth stock, its price will grow at the same rate as dividends.
So, P4 = P0(1.07)4 = $10.00(1.07)4 = $13.108 ≈ $13.11.

Or

D0 = (.50/1.07) = .467
D1= 0.50

D5 = 0.50 x (1.07)4 = .655

P4 = .655 / (.12-.07) = $13.10

3. Dividend yield = D1 / P0 = 2.25(1.035) / 50 = 4.66%

4. Capital gains yield = Growth rate = 6.5%

5. $50.16
6. $67.47

7. 8.19%
8. 7.78%

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