Intermediate Financial Management (MindTap Course List)
13th Edition
ISBN: 9781337395083
Author: Eugene F. Brigham, Phillip R. Daves
Publisher: Cengage Learning
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Chapter 8, Problem 3P
Summary Introduction
To determine: The stock price is expected 1 year from now and estimated required
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Woidtke Manufacturing’s stock currently sells for $22 a share. The stockjust paid a dividend of $1.20 a share (i.e., D0 = $1.20), and the dividend isexpected to grow forever at a constant rate of 10% a year. What stock priceis expected 1 year from now? What is the estimated required rate of returnon Woidtke’s stock (assume the market is in equilibrium with the requiredreturn equal to the expected return)?
Suppose that Do = $1.00 and the stock's last closing price is $15.85. It is expected that earnings and dividends will grow at a constant rate of
g = 3.50% per year and that the stock's price will grow at this same rate. Let us assume that the stock is fairly priced, that is, it is in equilibrium,
and the most appropriate required rate of return is rs = 10.00%.
The dividend received in period 1 is D1 = $1.00 × (1+0.0350) = $1.04 and the estimated intrinsic value in the same period is based on the
D2
constant growth model: P₁: TS-8
Using the same logic, compute the dividends, prices, and the present value of each of the dividends at the end of each period.
Activity Frame
Dividend
Price
PV
t 10.00%
Period
(Dollars)
(Dollars)
(Dollars)
0
$1.00
$15.85
1
1.03
16.46
$0.94
2
1.07
17.08
$0.97
3
1.11
17.69
$1.01
4
1.15
18.31
$0.97
5
1.19
18.92
$0.94
The dividend yield for period 1 is
and it will
The capital gain yield expected during period 1 is
and it will
each period.
each period.
If it is…
Suppose that Do = $1.00 and the stock's last closing price is $26.25. It is expected that earnings and dividends will grow at a constant rate of
g = 5.00% per year and that the stock's price will grow at this same rate. Let us assume that the stock is fairly priced, that is, it is in equilibrium,
and the most appropriate required rate of return is rs = 9.00%.
The dividend received in period 1 is D₁ = $1.00 × (1+0.0500) = $1.05 and the estimated intrinsic value in the same period is based on the
constant growth model: P₁ = P²
Using the same logic, compute the dividends, prices, and the present value of each of the dividends at the end of each period.
Price
(Dollars)
$26.25
PV of dividend at 9.00%
(Dollars)
Dividend
Period (Dollars)
0
$1.00
1.05
1
2
3
4
5
The dividend yield for period 1 is
The capital gain yield expected during period 1 is
4.00%
O 5.00%
and it will
9.00%
If it is forecasted that the total return equals 9.00% for the next 5 years, what is the forecasted total return out…
Chapter 8 Solutions
Intermediate Financial Management (MindTap Course List)
Ch. 8 - Define each of the following terms: a. Proxy;...Ch. 8 - Two investors are evaluating General Electric’s...Ch. 8 - A bond that pays interest forever and has no...Ch. 8 - Explain how to use the free cash flow valuation...Ch. 8 - Thress Industries just paid a dividend of 1.50 a...Ch. 8 - Prob. 2PCh. 8 - Prob. 3PCh. 8 - Prob. 4PCh. 8 - A company currently pays a dividend of $2 per...Ch. 8 - EMC Corporation has never paid a dividend. Its...
Ch. 8 - Current and projected free cash flows for Radell...Ch. 8 - A stock is trading at $80 per share. The stock is...Ch. 8 - Constant Growth Valuation Crisp Cookwares common...Ch. 8 - Prob. 10PCh. 8 - Brushy Mountain Mining Companys coal reserves are...Ch. 8 - Prob. 12PCh. 8 - Nonconstant Growth Stock Valuation Simpkins...Ch. 8 - Prob. 14PCh. 8 - Return on Common Stock
You buy a share of The...Ch. 8 - Prob. 16PCh. 8 - Value of Operations
Kendra Enterprises has never...Ch. 8 - Free Cash Flow Valuation
Dozier Corporation is a...Ch. 8 - Prob. 19PCh. 8 - Prob. 20PCh. 8 - Prob. 1MCCh. 8 - Prob. 2MCCh. 8 - Prob. 3MCCh. 8 - Prob. 4MCCh. 8 - Use B&M’s data and the free cash flow valuation...Ch. 8 - Prob. 6MCCh. 8 - Prob. 7MCCh. 8 - Prob. 8MCCh. 8 - Prob. 9MCCh. 8 - Prob. 10MCCh. 8 - Prob. 11MCCh. 8 - Prob. 13MCCh. 8 - (1) Write out a formula that can be used to value...Ch. 8 - Assume that Temp Force has a beta coefficient of...Ch. 8 - Prob. 16MCCh. 8 - Now assume that the stock is currently selling at...Ch. 8 - Prob. 19MCCh. 8 - Prob. 20MCCh. 8 - Prob. 21MC
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