STOCK VALUATION
1 60
.
QUESTION 1 Vis =? I
I
Tweetee Corporation’s common stock pays dividends of $1.60 and is expected to be no growth
in dividend in the future. If the required rate of return is 15%, what is the value of the stock?
$40$2 Di
g
constant ; Vcs =
1-g
QUESTION 2 ↓ !5 P5 =? 9 4% =
Scarlet Company’s common stock currently trades at $40 per share. The stock is expected to
pay a year-end dividend, D1 of $2 per share. The stock’s dividend is expected to grow at a
constant rate g, and its required rate of return is 9 percent. What is the expected price of the
stock five years from today (after the dividend D5 has been paid)? P5 Py(i g) Ps
= +
40(1 04)5
= .
QUESTION 3 supernormal growth
-
Miki Corporation’s stock is expected to pay a dividend of $1.25 per share at the end of the
year. The dividend is expected to increase by 20 percent per year for each year of the following
two years. After that, the dividend is expected to increase at a constant rate of 8 percent per
year. The stock has a required return of 10 percent. What should be the price of the stock today?
QUESTION 4
Bunny Company’s preferred stock is selling at $48 on the market and pays an annual dividend
of $3.50 per share.
a. What is the expected rate of return on the stock?
b. If an investor’s required rate of return is 7%, what is the value of the stock for
the investor?
c. Considering the investor’s required rate of return, does this stock seem to be a
12 % 7%
desirable investment?
RM 2
QUESTION 5 supernormal growth
-
=?!!
vis
I ↓
ABC Corporation currently pays a dividend of RM2 per share. It is estimated that the
company’s dividend will grow at a rate of 12 percent per year for the next 2 years, and then the
dividend will grow at constant rate of 7 percent thereafter. If the required rate of return on the
PC = ambil semua future
company’s stock is 10%, what is the stock’s current price?
=P
Vi dividend until infinitely
P
v =
QUESTION 6 supernormal growth
-
Microtech Corporation is expanding rapidly, and it currently needs to retain all of its earnings,
hence it does not pay any dividends. However, investors expect Microtech to begin paying
dividends, with the first dividend of RM1 coming 3 years from today. The dividend should
grow rapidly, at a rate 10 percent per year during years 4 and 5. After year 5, the company
should grow at a constant rate of 5 percent per year. If the required return on the stock is 15
percent, what is the value of the stock today?
5/11/23(7)
ANSWER
QUESTION 1
V = D / k
= $1.60 / 0.15
= $10.67
QUESTION 2
Step 1:
Determine the constant growth rate, g
ks = D1 / Po + g
0.09 = $2 / $40 + g
0.09 = 0.05 + g
g = 0.04 @ 4%
Step 2:
Determine the expected price of the stock 5 years from today
P5
= Po x (1 + g)n
= $40 x (1.04)5
= $40 x 1.21665
= $48.67
QUESTION 3
Step 1:
Calculate the dividends
D1 = $1.25
D2 = $1.25 x 1.20 = $1.50
D3 = $1.50 x 1.20 = $1.80
D4 = $1.80 x 1.08 = $1.944
Step 2:
Calculate the price of the stock at year 3, when it becomes a constant growth stock
P3 = D4 / (k - g)
= $1.944 / (0.10 - 0.08)
= $97.20
Step 3:
Calculate the price of the stock today
P3 = ($1.25 / 1.10) + $1.50 / (1.10)2 + ($1.80 + $97.20) / (1.10)3
= $1.1364 + $1.2397 + $74.3802
= $76.76
QUESTION 4
a. K = D / V
= $3.50 / $48.00.
= 7.29%
b. V = D / K
= $ 3.50 / 0.07
= $50.00
c. Yes, it is a desirable investment because the market value of the stock, $48.00 is lower than
its intrinsic value, $50.00 and the expected rate of return on the stock, 7.29% is much higher
than the investor’s required rate of return, 7%.
QUESTION 5
g =12% g = 7%
0 1 2 3
Do = RM2
Kcs = 10%
D1 = 2 (1+0.12) D . (Ity) / Do (Itg) - for growth rate same
1)
D1 = 2.24 Di = Do (1 .
Do = D, (1 .
09)
D3 =
D2(1 + 9)
D2 = 2.24 (1.12)
D2 = 2.5088
D3 = 2.5088(1.07)
D3 = 2.684
D3
P2 =
Kcs − g
2.684
P2 =
0.1 − 0.07
P2 = 89.48
2.24 2.5088 89.48
Vcs = + +
(1 + 0.1) (1.1)
2 2
(1.1)
Vcs = 2.036 + 2.073+73.95
Vcs = 78.06
QUESTION 6
g =10% g = 5%
0 1 2 3 4 5 6
D3 =RM1
Kcs = 15%
D4 = 1(1.1)
D4 = 1.10
D5 = 1.10(1.1)
D5 = 1.21
D6 = 1.21 (1.05)
D6 = 1.27
1.27
P5 =
0.15 − 0.05
P5 = 12.70
1 1 .1 1.21 12.70
Vcs = 3
+ 4
+ 5
+ 5
(1.15) (1.15) (1.15) (1.15)
Vcs = 8.20