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Ch 8 Problems

# Ch 8 Problems - = Div1/1 k Div2(l k)2 Div3(1 k)3 Div4(1 k)4...

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Stock Valuation You want to value Maxima Machinery stock. You expect the firm to have a growth rate of 12%) for the next two years, 9%) for the succeeding two years, after which the firm's growth will be a constant 4.5% a year. Maxima has just paid a dividend of \$2.00. If the discount rate is 100/0, what is the price of the stock? DivO = \$2.00 Div1 = 2(1.12) = 2.24 Div2 = 2(1.12)2 = 2.51 Div3 = 2(1.12)2(1.09) = 2.73 Div4 = 2(1.12)2(1.09)2 = 2.98 Div5 = 2(1.12)2(1.09)2(1.045) = 3.11 Va1ue(year 4) = Div5/k-g = 3.11/.1-.045 = \$56.63 Timeline: Year o 2 3 4 Value o 2.24 2.52 2.73 2.98 56.63 59.61 Value(year 0)

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Unformatted text preview: = Div1/1+k + Div2/(l+k)2 + Div3/(1+k)3 + Div4/(1+k)4 + Tennina1Va1ue/(1 +k)4 = Va1ue(year 0) = 2.24/1 +.1 + 2.52/(1 +.1)2 + 2.73/(1 +.1)3 + 59.61/(1 +.1)4 = \$46.88 7.19 Comprehensive Problem • XYZ stock currently sells for \$50 per share. The next expected annual dividend is \$2, and the growth rate is 6%. What is the expected rate of return on this stock? • If the required rate of return on this stock were 12%, what would the stock price be, and what would the dividend yield be? B-31 Expected return = 2/50 + .06 = .10 Price = 2/ (.12 - .06) = \$33.33 Dividend yield = 2/33.33 = 6% 7.31...
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Ch 8 Problems - = Div1/1 k Div2(l k)2 Div3(1 k)3 Div4(1 k)4...

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