Chap 6 - Stock Valuation

Question 1

Current Price (P0)…Dividend just paid

Answer 1

P0=D0(1+g)/(R-g)

Question 2

Constant dividend growth model (Pt)

Answer 2

Pt=Dt x (1+g)/(R-g)

Question 3

constant rate stock price (P3)

Answer 3

P3={P0(1+g)3}…..{3 is a raised power}
OR
P3=D3(1+g)/(R-g)

Question 4

constant rate stock price (P14)

Answer 4

P14={P0(1+g)14}…..{14 is a raised power}
OR
P14=D14(1+g)/(R-g)

Question 5

Required Return (R)

Answer 5

R=D1/P0 + g
OR
R=dividend yield + capital gains yield(g)
OR
R=D/P0

Question 6

Constant growth model Current Price (P0)…Dividend will pay next yr

Answer 6

P0=D1/(R-g)

Question 7

Dividend Yield

Answer 7

DY=D/P

Question 8

PE Ratio

Answer 8

PE=Price/Earnings

Question 9

Price(P)

Answer 9

P=D/R

Question 10

Capital Gains Yield

Answer 10

CGY= R - Dividend Yield

Question 11

Planned Reduction in dividends….
I.E…SCo. just pd a dividend of $1.80 per share. The company will increase its dividend by 20% next year and will then reduce its dividend growth rate by 5 percentage points per year until it reaches the industry average of 5% dividend growth, after which the company will keep a constant growth rate forever. If the required return of the company’s stock is 13%, what will a share of stock sell for today?

Answer 11

P3=1.80(1+.20)(1+.15)(1+.10)(1+.05) /.13 - .05 = 35.86
THEN
P0=1.80(1+.20)/(1+.13) + 1.80(1+.20)(1+.15)/(1+.13)2 + 1.80(1+.20)(1+.15)(1+.10)/(1+.13)3 + 35.86/(1+.13)3
P0=30.6032

Question 12

Next Years Dividend

Answer 12

D1 = P0 x dividend yield

Question 13

Current year Dividend pmt

Answer 13

D1 = D0 (1+g)