FIN3300 Solution Ch8 (W 0714)-1

FIN3300 Solution Ch8 (W 0714)-1 - Solution Chapter 8 Stock...

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Solution Chapter 8: Stock Valuation Page 255 Questions: 5, 6, 7, 8, 9 5. The required return of a stock is made up of two parts: The dividend yield and the capital gains yield. So, the required return of this stock is: R = Dividend yield + Capital gains yield = .063 + .052 = .1150 or 11.50% 6. We know the stock has a required return of 11 percent, and the dividend and capital gains yield are equal, so: Dividend yield = 1/2(.11) = .055 = Capital gains yield Now we know both the dividend yield and capital gains yield. The dividend is simply the stock price times the dividend yield, so: D 1 = .055($47) = $2.59 This is the dividend next year. The question asks for the dividend this year. Using the relationship between the dividend this year and the dividend next year: D 1 = D 0 (1 + g ) We can solve for the dividend that was just paid: $2.59 = D 0 (1 + .055) D 0 = $2.59 / 1.055 = $2.45 7. The price of any financial instrument is the PV of the future cash flows. The future dividends of this stock are an annuity for 11 years, so the price of the stock is the PVA, which will be:
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