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Question: Snyder Computer Chips Inc. is experiencing a
period of rapid growth. Earnings and dividends are e...
Snyder Computer Chips Inc. is experiencing a period of rapid growth. Earnings and dividends are expected
to grow at a rate of 15% during the next two years, at 13% in the third year, and at a constant rate of 6%
thereafter. Snyder's last dividend was $1.15, and the required rate of return on the stock is 12%.a. Calculate
the value of the stock today.b. Calculate P1 and P2.c. Calculate the dividend yield and the expected capital
gains yield for year 1.
Expert Answer
Amrutha
answered this
D1 = 1.15*(1+0.15) = 1.3225
D2 = 1.3225*(1+0.15) = 1.52
D3 = 1.52*(1+0.13) = 1.719
D4 = 1.719*(1+0.06) = 1.82
According to dividend discount model,
P0 = D1/(R-G)
D1 - Dividend at t =1
R - Required rate
G - Growth rate
P3 = D4/(R-g) = 1.821/(0.12-0.06) = 30.36
Find P0 by discounting the future dividends and P3
P0 = 1.3225/(1+0.12) + 1.52/(1+0.12)^2 + 1.718/(1+0.12)^3 + 30.36/(1+0.12)^3 = $25.23
Current value of stock = $25.23
b.
P1 = 1.52/(1+0.12)^1 + 1.718/(1+0.12)^2 + 30.36/(1+0.12)^2 = $26.93
P2 = 1.718/(1+0.12)^1 + 30.36/(1+0.12)^1 = $28.64
c.
Dividend yield = Dividend/Price
For year 1, Dividend yield = 1.3225/25.23 = 0.0524 = 5.24%
Capital gains yield = (P1-P0)/P0 = (26.93-25.23)/25.23 = 0.0674 = 6.74%
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Snyder Computer Chips, Inc. is experiencing a period of rapid growth. Earnings and dividends are
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Snyder Computer Chips Inc. is expecting a period of rapid growth. Earnings and dividends are expected
to grow at a rate of 15% during the next 2 years at 13% in the third year, and at a constant rate of 6%
thereafter. Snyder’s last dividend was $1.15, and the required rate of return on the stock is 12%
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