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Unformatted text preview: ts budget, and probably should issue equity to maintain its target capital structure. Payout = $0 / $400,000 = 0% If NI = $800,000 … Dividends = $800,000 – (0.6)($800,000) = $320,000. Payout = $320,000 / $800,000 = 40% One Period Example
One Period Example Suppose you are thinking of purchasing the stock of Moore Oil, Inc. and you expect it to pay a $2 dividend in one year and you believe that you can sell the stock for $14 at that time. If you require a return of 20% on investments of this risk, what is the maximum you would be willing to pay? Compute the PV of the expected cash flows
Price = (14 + 2) / (1.2) = $13.33
Or FV = 16; I/Y = 20; N = 1; CPT PV = 13.33 Two Period Example
Two Period Example Now what if you decide to hold the stock for two years? In addition to the dividend in one year, you expect a dividend of $2.10 in and a stock price of $14.70 at the end of year 2. Now how much would you be willing to pay? PV = 2 / (1.2) + (2.10 + 14.70) / (1.2)2 = 13.33
Or CF0 = 0; C01 = 2; F01 = 1; C02 = 16.80; F02 = 1; NPV; I = 20; CPT NPV = 13.33 Three Period Example
Three Period Example Finally, what if you decide to hold the stock for three per...
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- Winter '14