1) Use the Dividend Discount Model to determine the expected annual growth rate
ID: 2733954 • Letter: 1
Question
1) Use the Dividend Discount Model to determine the expected annual growth rate of the dividend for ELO stock. The firm is expected to pay an annual divided of $19.84 per share in one year. ELO shares are currently trading for $280.62 on the NYSE, and the expected annual rate of return for ELO shares is 10.82%. Answer as a % to 2 decimal places (e.g., 12.34% as 12.34).
2)JFG stock is expected to pay a dividend of $5.78 a share in one year. Thereafter, the expected annual growth rate of the dividend is 3.9%. Based on the Dividend Discount model, what is the most that you would be willing to pay for a share of JFG stock today if your required rate of return is 11.7% per annum? Answer to the nearest penny.
3)Use the Dividend Discount Model to compute the expected price of a stock in 4 years. Each share is expected to pay a dividend of $9.97 in one year. Investors' annual required rate of return is 16.6%, and the expected growth rate of the dividend is 2.8% per annum. Answer to the nearest penny.
4)What is the expected annual capital gain yield for Orange Corp stock, based on the Dividend Discount Model? The company plans to pay an annual dividend of of $5.96 per share in one year. The expected annual growth rate of the dividend is 16.52%, and the required rate of return for the stock is 18.89%. Answer as a percentage, 2 decimal places (e.g., 12.34% as 12.34).
5)One year ago, Bill bought 300 shares of Conglomerated Inc. Now, one year later, the stock has a market price of $46.06 per share, compared to Bill's purchase price of $40.05 a share. During the year, Bill collected dividends of $0.32 per share. Compute Bill's realized rate of return for the year? Answer as a percentage, 2 decimal places (e.g., 12.34% as 12.34).
Explanation / Answer
1. D1 = $19.84, P0 = $280.62, Ke = 10.82%
280.62 = 19.84 / (0.1082 - g)
On Solving we gate G = Growth rate = 0.0375 or 3.75%
2. D1 = $5.78, G = 3.9%, Ke = 11.7%
Price = 5.78 / (0.117 - 0.039) = $74.10
3) D1 = $9.97, G = 2.8%, Ke = 16.6%
Price as on today = 9.97 / (0.166 - 0.028) = $72.25
Price in 4 Years = $72.25 (1 + 0.166)4 = $133.57
4) D1 = $5.96, G = 16.52%, Ke = 18.89%
Price = 5.96 / (0.1889 - 0.1652) = $251.48
Price after 1 Year = $251.48 ( 1 + 0.1889) = $298.98
Capital Gain Yield = {5.96 + (298.98 - 251.48)} / 251.48 = 21.26%
5) Realized rate of return = {0.32 + (46.06 - 40.05)} / 40.05 = 15.81%
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