StockBondValue

# StockBondValue - What is the value of a stock with The...

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Unformatted text preview: What is the value of a stock with The stock value is found from: P = D t 1 + r ( ) t t = 1 T " + D T + 1 r # g c \$ % & ' ( ) 1 + r ( ) # T P is the stock price at time t = 0 D t is the expected dividend at time t = D t-1 (1 + g i ) r is the required rate of return g i is the initial growth rate g c is the rate of constant growth The first step is to calculate all of the D t values, and then substitute them into the above equation to get the stock value. a. A Dividend at time zero of \$1.25, a required rate of return of 14%, and expected growth of 12% for 5 years followed by a constant growth rate of 4%? D 1 = (\$1.25)(1 + .12) = \$1.400 D 4 = (\$1.25)(1 + .12) 4 = \$1.967 D 2 = (\$1.25)(1 + .12) 2 = \$1.568 D 5 = (\$1.25)(1 + .12) 5 = \$2.203 D 3 = (\$1.25)(1 + .12) 3 = \$1.756 D 6 = (\$1.25)(1 + .12) 6 = \$2.467 P = (1.400)/(1 + .14) + (1.568)/(1 + .14) 2 + (1.756)/(1 + .14) 3 + (1.967)/(1 + .14) 4 + (2.203)/(1 + .14) 5 + [ 2.467/(.14 – .04) ](1 + 0.14)-5 P = 1.228 + 1.207 + 1.185 + 1.165 + 1.144 + 12.814 P = \$18.74 b. A Dividend at time zero of \$2.50, a required rate of return of 18%, and expected growth of 15% for 7 years followed by a constant growth rate of 2%? D 1 = (\$2.50)(1 + .15) = \$2.875 D 5 = (\$2.50)(1 + .15) 5 = \$5.028 D 2 = (\$2.50)(1 + .15) 2 = \$3.306 D 6 = (\$2.50)(1 + .15) 6 = \$5.783 D 3 = (\$2.50)(1 + .15) 3 = \$3.802 D 7 = (\$2.50)(1 + .15) 7 = \$6.650 D 4 = (\$2.50)(1 + .15) 4 = \$4.373 D 8 = (\$2.50)(1 + .15) 8 = \$7.648 P = (2.875)/(1 + .18) + (3.306)/(1.18) 2 + (3.802)/(1.18) 3 + (4.373)/(1.18) 4 + (5.028)/(1.18) 5 + (5.783)/(1.18) 6 + (6.650)/(1.18) 7 + [ 7.648/(.18 – .02) ](1 + 0.18)-7 P = 2.436 + 2.374 + 2.314 + 2.255 + 2.198 + 2.142 + 2.088 + 15.005 P = \$30.81 c. A Dividend at time zero of \$5, a required rate of return of 28%, and expected growth c....
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StockBondValue - What is the value of a stock with The...

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