Jones company stock paid the following dividends, and its closing price at the e

ID: 2614579 • Letter: J

Question

Jones company stock paid the following dividends, and its closing price at the end of 2017 is $20

Year Dividend

2012 $1.40

2013 $1.40

2014 $1.45

2015 $1.35

2016 $1.55

2017 $1.70

The required rate of return for this stock is 15%.

Calculate the growth rate of the stock.

What is the value of the stock at the end of 2017?

Is this stock over value or under value in 2017? Why?

What is the estimated value of the stock at the end of 2020?

1) Growth rate

D0 * (1 + g)5 = D5

1.40 * (1+ g)5= 1.70

= (1.70/1.4)5 -1

= 3.96% [Compounded growth rate]

2) Value of the stock using constant dividend growth model = D1/(r-g)

where D1 = the next expected dividend = D0 * (1+ g)

g = Growth rate

P = 1.7 * ( 1 + 0.0396) / [ 0.15 - 0.0396]

= $ 16

3) OVERVALUED

Stock that is selling at price above its intrinsic value, hence it is overvalued

i.e. $16 < $20

4. Estimated value of the stock at the end of 2020 =

Dividend D0 (2017) = $1.7

D4 = 1.7 * (1.0396)4 = 1.986

Value of stock = 1.986 / (0.15 - 0.0396)

= 17.99 or

= $18

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