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chap006solutions

# chap006solutions - Solutions to Chapter 6 Valuing Stocks 1...

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Solutions to Chapter 6 Valuing Stocks 1. No, this does not invalidate the dividend discount model. The dividend discount model allows for the fact that firms may not currently pay dividends. As the market matures, and Amazon’s growth opportunities moderate, investors may justifiably believe that Amazon will enjoy high future earnings and will then pay dividends. The stock price today can still reflect the present value of the expected per share stream of dividends. 2. Dividend yield = Dividend/Price = DIV 1 /P 0 0.08 = 2.40/P 0 P 0 = \$30 3. The preferred stock pays a level perpetuity of dividends. The expected dividend next year is the same as this year’s dividend (\$8). a. \$8.00/0.12 = \$66.67 b. \$8.00/0.12 = \$66.67 c. Dividend yield = \$8/\$66.67 = 0.12 =12% Capital gains yield = 0 Expected rate of return = 12% 4. r = DIV 1 /P 0 + g = 8% + 5% = 13% 5. The value of a share of common stock equals the present value of dividends received out to the investment horizon, plus the present value of the forecast stock price at the horizon.

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