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IBX Stock: Expected Returns and Valuation

The document contains 4 questions about calculating stock prices, returns, growth rates, and other financial metrics: 1. It asks about expected dividend yield, price appreciation rate, and holding period return for a stock expected to pay a dividend of $2.15 in a year when its current price is $50 and expected future price is $59.77. 2. It asks about intrinsic value, future expected price, dividend yield, and holding period return for a stock with a required return of 15.2% that is expected to grow dividends at 11.2% forever. 3. It asks about calculating the price of a stock with a plowback ratio of 0.6 and ROE of 20

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30 views1 page

IBX Stock: Expected Returns and Valuation

The document contains 4 questions about calculating stock prices, returns, growth rates, and other financial metrics: 1. It asks about expected dividend yield, price appreciation rate, and holding period return for a stock expected to pay a dividend of $2.15 in a year when its current price is $50 and expected future price is $59.77. 2. It asks about intrinsic value, future expected price, dividend yield, and holding period return for a stock with a required return of 15.2% that is expected to grow dividends at 11.2% forever. 3. It asks about calculating the price of a stock with a plowback ratio of 0.6 and ROE of 20

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Hiền Vy
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© All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PDF, TXT or read online on Scribd

1. You expect the price of IBX stock to be $59.77 per share a year from now.

Its current market


price is $50, and you expect it to pay a dividend 1 year from now of $2.15 per share.

a. What are the stock’s expected dividend yield, rate of price appreciation, and holding-period
return?

b. If the stock has a beta of 1.15, the risk-free rate is 6% per year, and the expected rate of
return on the market portfolio is 14% per year, what is the required rate of return on IBX
stock?

c. What is the intrinsic value of IBX stock, and how does it compare to the current market
price?

2.
a. IBX’s stock dividend at the end of this year is expected to be $2.15, and it is expected to
grow at 11.2% per year forever. If the required rate of return on IBX stock is 15.2% per year,
what is its intrinsic value?
b. b. If IBX’s current market price is equal to this intrinsic value, what is next year’s expected
price?
c. c. If an investor were to buy IBX stock now and sell it after receiving the $2.15 dividend a
year from now, what is the expected capital gain (i.e., price appreciation) in percentage
terms? What are the dividend yield and the holding-period return?

3.
a. Calculate the price of a firm with a plowback ratio of 0.60 if its ROE is 20%. Current earnings,
E1 , will be $5 per share, and k =12.5%.
b. What if ROE is 10%? Compare the firm’s price in this instance to that of a firm with the same
ROE and E1 , but a plowback ratio of b= 0.

4. ABC stock has an expected ROE of 12% per year, expected earnings per share of $2, and
expected dividends of $1.50 per share. The required return is 10% per year.
a. What are its expected growth rate, its price, and its P/E ratio?
b. If the plowback ratio were 0.4, what would be the expected dividend per share, the growth
rate, price, and the P/E ratio?

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