Chapter 8-Practice Worksheet ? Yixin I nc. has some stocks outstanding. The stoc

Question

Chapter 8-Practice Worksheet ? Yixin I nc. has some stocks outstanding. The stocks paid $1.25 last year. The dividends are not expected to increase. If the appropriate discount rate is 11%, what is the value of Yixin's stock? now. In the fifth year, Taelor expects to pay S3 per year and the dividends will grow by 2% per year. If the required rate of return is 12%, what is the price of Taelor's stock? 2. Taelor Corp, has some stocks outstanding. Taelor promises to start paying dividends 5 years from

Explanation / Answer

1) Value of Yixin's Stock $    11.36 Working: As per dividend discount model, current value of stock is the present value of future dividends. Value of Yixin's Stock = Future annual dividends/discount rate = $       1.25 /           0.11 = $    11.36 2) Value of Taelor's stock $    17.36 Working: As per dividend discount model, current value of stock is the present value of future dividends. Present value of dividend in 5 Years = D5*(1+g)/(Ke-g) Where, = 3*(1+0.02)/(0.12-0.02) D5 $             3 = $    30.60 g 2% Ke 12% Present Value of dividend now = Present value of dividend in 5 Years x Present value of 1 = $    30.60 x (1.12^-5) = $    30.60 x 0.567427 = $    17.36

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