Company Z stock currently sells for $40. The required return on the stock is 8%.

Question

Company Z stock currently sells for $40. The required return on the stock is 8%. Company Z maintains a constant 5% growth rate in dividends. Calculate the most recent dividend.
What is the dividend yield?

Company Z has an investment opportunity costing $4 million today and providing cash flows $1 million, $2 million and $2,5 million for 1, 2 and 3 years from now respectively. If the required return of the project is 8% what is the Net Present Value (NPV) of this project? Would you accept this project?

Explanation / Answer

Part-a:

Part-b:

Current price = 40 Required return = 8% Growth rate = 5% Price of stock (growth model) 40 = D0*(1+g)/(ke-g) Ke = Required return 40 = D0*(1+.05)/(.08-.05) g = Growth rate 1.20 = D0*(1.05) Do = Latest dividend D0 = 1.2/1.05 = 1.14 The most recent dividend is $ 1.14

Part-b:

Years Cash flow Discount factor @8% Present value 1 1.00 0.926 0.93 2 2.00 0.857 1.71 3 2.50 0.794 1.98 Total 4.63 Less: Initial outlay 4.00 Net Present value (NPV) 0.63 Yes, due to positive NPV, project could be accepted.

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