Fill This Form To Receive Instant Help
Fill This Form To Receive Instant Help
Homework answers / question archive / Consider the following three stocks: Stock A is expected to provide a dividend of $12
Consider the following three stocks: Stock A is expected to provide a dividend of $12.00 a share forever. Stock B is expected to pay a dividend of $7.00 next year. Thereafter, dividend growth is expected to be 4.00% a year forever. Stock C is expected to pay a dividend of $4.00 next year. Thereafter, dividend growth is expected to be 20.00% a year for five years (i.e., years 2 through 6) and zero thereafter. a-1. If the market capitalization rate for each stock is 12.00%, what is the stock price for each of the stocks? (Do not round intermediate calculations. Round your answers to 2 decimal places.) a-2. Which stock is the most valuable? multiple choice 1 Stock C Stock B Stock A b-1. If the market capitalization rate for each stock is 7.00%, what is the stock price for each of the stocks? (Do not round intermediate calculations. Round your answers to 2 decimal places.) b-2. Which stock is the most valuable?
a1)
Stock A
Price of stock A = Dividend of next period / Required rate of return
Dividend of next period = 12$
Required rate of return = 12%
Thus price of stock A = 12/12%
= 100 $
Stock B
Price of stock B = Dividend of next period / Required rate of return - growth rate
Dividend of next period = 7$
Required rate of return = 12%
Growth rate = 4%
Thus price of stock A = 7/12%-4%
= 7/8%
= 87.50 $
Stock C
Statement showing price of stock C
| Year | Dividend | PVIF @ 12% | PV | |
| 1 | 4.0000 | 0.8929 | 3.57 | |
| 2 | 4 x 1.2 | 4.8000 | 0.7972 | 3.83 |
| 3 | 4.80 x 1.2 | 5.7600 | 0.7118 | 4.10 |
| 4 | 5.76 x1.2 | 6.9120 | 0.6355 | 4.39 |
| 5 | 6.912 x 1.2 | 8.2944 | 0.5674 | 4.71 |
| 6 | 8.2944 x 1.2 | 9.9533 | 0.5066 | 5.04 |
| P6/ Horizon Value | 82.9440 | 0.5066 | 42.02 | |
| Price of stock | 67.66 |
Thus price of Stock C = 67.66 $
Horizon Value = Dividend for year 7 / Required rate of retun - growth rate
required rate of return = 12%
Growth rate = 0%
Dividend for year 7 = Dividend for year 6 (1+ growth rate)
Dividend for year 7 = 9.9533(1+0%)
= 9.9533
Thus Horizon Value = 9.9533/12%
=82.9440 $
a-2) Stock A is most valuable as it has highest stock price
b-1)
Stock A
Price of stock A = Dividend of next period / Required rate of return
Dividend of next period = 12$
Required rate of return = 7%
Thus price of stock A = 12/7%
= 171.43 $
Stock B
Price of stock B = Dividend of next period / Required rate of return - growth rate
Dividend of next period = 7$
Required rate of return = 7%
Growth rate = 4%
Thus price of stock A = 7/7%-4%
= 7/3%
= 233.33 $
Stock C
Statement showing price of stock C
| Year | Dividend | PVIF @ 7% | PV | |
| 1 | 4.0000 | 0.9346 | 3.74 | |
| 2 | 4 x 1.2 | 4.8000 | 0.8734 | 4.19 |
| 3 | 4.80 x 1.2 | 5.7600 | 0.8163 | 4.70 |
| 4 | 5.76 x1.2 | 6.9120 | 0.7629 | 5.27 |
| 5 | 6.912 x 1.2 | 8.2944 | 0.7130 | 5.91 |
| 6 | 8.2944 x 1.2 | 9.9533 | 0.6663 | 6.63 |
| P6/ Horizon Value | 142.1897 | 0.6663 | 94.75 | |
| Price of stock | 125.20 |
Thus price of Stock C = 125.20 $
Horizon Value = Dividend for year 7 / Required rate of retun - growth rate
required rate of return = 7%
Growth rate = 0%
Dividend for year 7 = Dividend for year 6 (1+ growth rate)
Dividend for year 7 = 9.9533(1+0%)
= 9.9533
Thus Horizon Value = 9.9533/7%
=142.1897 $
b-2) Stock B is most valuable stock if capitalization rate for each stock is 7.00%
