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305exam2

# 305exam2 - CH 5 Stock share of ownership(common Preferred...

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CH 5 Stock- share of ownership (common) Preferred stock- dividend payout Stock payoff 2 forms o Dividends o Capital gain R stock =div 1 +P 1 -P 0 /P 0 o If we buy a stock for \$100, and expect a \$5 dividend a price of \$110 in 1 year, what is the return? 5+110-100/100= 15% o If we know something about expected return and dividend, we can predict price Price P 0 = div 1 +P 1 /1+r P 0 =5+110/1.15=\$100 Next year’s price P 1 =DIV 2 +P 2 /(1+r) P 0 =1/1+r(DIV 1 +P 1 ) =1/(1+r)(DIV 1 +(DIV 2 +P 2 /(1+r)) =DIV 1 /(1+r)+DIV 2 +P 2 /(1+r) 2 =E t=1 n DIV 2 /(1+r) t +P N /(1+r) n assume dividends never grow we never sell o =E t=1 infinity DIV t /(1+r) t o P 0 =DIV 1 /r o if we expect to grow growing perpetuity P 0 =DIV 1 /r-g o Return r= DIV 1 /P 0 +g (capitalization rate) o The return on a stock is composed of 2 separate

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pieces Dividend yield (DIV 1 /P 0 ) next periods dividend = D 1 The expected growth rate of dividends o Estimating cost of equity capital If a stock is \$41.67 and next years dividend is expected to be \$1.49 what is the cost of equity? DIV Yield= \$1.49/\$41.67= 3.6% o Payout Ratio = DIV/EPS (earnings per share) o Plowback Ratio = 1-Payout Ratio o G= Plowback*ROE o Know these 3 equations not on sheet ROE=EPS/book equity per share (not responsible) o If the payout ratio is = to 62% and ROC=.10 Plowback= 1-.62= .38 G= .38*.10=.038=3.8% R= 3.6%+3.8%=7.4% o If company XYZ has an ROE of 20% and next year EPS= \$4, plowback ratio=.30 what is the price if investors require 12% P 0 =DIV 1 /r-g Payout =1-.30= 70% DIV 1 = \$4*.7=\$2.80 G= .20*.30=.06 2.80/.12-.06= \$46.67 Super-Normal Growth (book has another name) o Grow-tech Projects Dividends will grow at 20%/year for 3 years. After that growth will be 5%/year. If today’s dividend is \$2.00, and investors demand 14% return, what is the stock price?
o Period 1 dividend 2 *1.20= 2.40 and so on period 2 \$2.88, period 3 \$3.46 period 4 \$3.46*1.05= 3.63 o Now present value \$2.40/(1.14)=2.11, 2.88/(1.14) 2 =2.22, 3.46/ (1.14) 3 =2.33, P 3 = 3.63/.14-.05=\$40.33 40.33/(1.14) 3 =27.22?

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305exam2 - CH 5 Stock share of ownership(common Preferred...

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