1)Two-Phase Stock Valuation 2: The current dividend for Cisco Systems is $1. Suppose that analysts believe that Cisco's

Question

1)Two-Phase Stock Valuation 2: The current dividend for Cisco Systems is $1. Suppose that analysts believe that Cisco's dividends for the next 5 years will grow at 15%. After the fifth year, analysts expect revenues (and dividends) for the company to grow at 5% forever. The required return for Cisco given its relevant risk is 18%. What should the current price for Cisco stock be? 1. Estimate value of Phase I dividends. 2. Estimate value of Phase II dividends. 3. Find PV of Phase II dividends. 2) Calculate the initial price of a price-weighted index that comprises both stocks A and B. 2. Calculate the final price of the same price-weighted index that comprises both stocks A and 3. Find the percentage change in the price weighted average of the two stocks 4 Calculate the final price of a market value weighted index that comprises A and B (assume that the initial price of the index is 100). 5. What is the percentage change of the value weighted index? Assume now that at t-0, stock B

Help In Homework · Accepted Answer

1) Current Dividend 1 Phase 1 growth rate 0.15 Phase 2 growth rate 0.05 Discount rate (r) 0.18 Time (N) 1 2 3 4 5 Dividend at the end of each year increases by 15% 1.15 1.3225 1.520875 1.749006 2.011357 Discount factor is given by (1/((1+r)^N)) 0.847458 0.718184 0.608631 0.515789 0.437109 Present value is dividends at each year multiplied by discount factor at each year 0.974576 0.949799 0.925651 0.902118 0.879183 Sum of Phase 1 dividends is adding all the present values 4.631327 1) Value of Phase 1 Dividends 4.631327 Phase 2 Dividends Dividends will grow at 5% after end of 5th year till every year Here we will calculate terminal vale given by (Dividend at year 5*(1+0.05))/(r-g) 16.24558 Terminal value (which is value of phase 2 dividends ) will be received by investor at the end of year 5 16.24558 2) Phase 2 dividends 16.24558 3) Present value of phase 2 dividends is 16.24558*0.437109 7.101093 2) Part 1 Calculating initial Price weighted index comprising of stock A and B at period (t) 0 = price of stock A + Price B / number of stock = 20 + 60 / 2 =40 Final Weighted index comprising of stock A and stock B at period (t) 1 = 18 + 70 / 2 = 44 Percentage change in price weighted average of two stocks = (Final price weighted index/ Initial price weighted index ) -1 = 44/40 -1 = 10% Final market Value weighted index comprising of stock A and B = ( price of stock A * number of share ) + ( Price of stock B * number of share ) = 320 where in weight of stock A = 56% and stock B is 44

Why Choose Us?

0% AI Guarantee

24/7 Support

Plagiarism Free

Expert Tutors

100% Confidential

On-Time Delivery

1)Two-Phase Stock Valuation 2: The current dividend for Cisco Systems is $1

Expert Solution

Archived Solution

Current Dividend	1
Phase 1 growth rate	0.15
Phase 2 growth rate	0.05
Discount rate (r)	0.18

Time (N)	1	2	3	4	5
Dividend at the end of each year increases by 15%	1.15	1.3225	1.520875	1.749006	2.011357
Discount factor is given by (1/((1+r)^N))	0.847458	0.718184	0.608631	0.515789	0.437109
Present value is dividends at each year multiplied by discount factor at each year	0.974576	0.949799	0.925651	0.902118	0.879183
Sum of Phase 1 dividends is adding all the present values	4.631327

1) Value of Phase 1 Dividends	4.631327

Phase 2 Dividends
Dividends will grow at 5% after end of 5th year till every year
Here we will calculate terminal vale given by (Dividend at year 5*(1+0.05))/(r-g)	16.24558

Terminal value (which is value of phase 2 dividends ) will be received by investor at the end of year 5	16.24558

2) Phase 2 dividends	16.24558

3) Present value of phase 2 dividends is 16.24558*0.437109	7.101093