Unformatted text preview: o on. Thus, the expected value one year from now is $32.10:
P1 = Mini Case: 7 - 18 2 ( rs g ) = $2.247
0.07 d. 4. What are the expected dividend yield, the capital gains yield, and the total
return during the first year? Answer: The expected dividend yield in any year n is
Dividend Yield = Dn
n1 While the expected capital gains yield is
Capital Gains Yield = ( Ö n Ö n 1 )
=rÖ n 1 n . n 1 Thus, the dividend yield in the first year is 10 percent, while the capital gains yield is
ividend yield = $2.12/$30.29
Capital gains yield
e. Now assume that the stock is currently selling at $30.29. What is the expected
rate of return on the stock? Answer: The constant growth model can be rearranged to this form:
r s= 1 g.
0 Here the current price of the stock is known, and we solve for the expected return.
For Temp Force:
r s= $2.12/$30.29 + 0.060 = 0.070 + 0.060 = 13%. Mini Case: 7 - 19 f. What would the stock price be if its dividends were expected to have zero
growth? Answer: If Temp Force¶s dividends were not expected to grow at all, then its dividend stream
would be a perpetuity. Perpetuities are valued as shown below:
0 r = 13%
g = 0% | 1 2 3 | | | 2.00 2.00 2.00 1.77
. P0 = 15.38
P0 = PMT/r = $2.00/0.13 = $15.38.
Note that if a preferred stock is a perpetuity, it may be valued with this formula. Mini Case: 7 - 20 g. Now assume that Temp Force is expected to experience supernormal growth of
30 percent for the next 3 years, then to return to its long-run constant growth
rate of 6 percent. What is the stock¶s value under these conditions? What is its
expected dividend yield and capital gains yield be in year 1? In year 4? Answer: Temp Force is no longer a constant growth stock, so the constant growth model is not
applicable. Note, however, that the stock is expected to become a constant growth
stock in 3 years. Thus, it has a nonconstant growth period followed by constant
growth. The easie...
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- Spring '12
- Valuation, Dividend yield