. The McKenzee Corp. has not paid a dividend in the past, but it is expected to
ID: 2739290 • Letter: #
Question
. The McKenzee Corp. has not paid a dividend in the past, but it is expected to start paying dividends about four years from today. The dividend will start at $0.20 per share and increase at the rate of 60% for two years, then 40% for three more years, and will grow at 6% per year after that for the foreseeable future. McKenzee has a beta of 0.70, the risk-free rate is 4% and the market risk premium is 6.5%. Calculate the expected price per share (today) for McKenzee Stock. If you purchase the stock at the price you have calculated, and what will be the dividend yield and capital gains yield in the first year?
Explanation / Answer
Ke = Rf + beta * risk premium
= 4% + 0.7 * 6.5% = 8.55%
Caluclation price at the end of the year 1
Price after one year = 32.68332
Capital gain yield = (32.68332 - 30.158) / 30.158 = 8.37%
since no dividend will be paid in year one so no dividend yield.
Year Dividend Growth rate PVF@8.55% Discounted cashflow 4 0.2 60% 0.7202 0.14404 5 =0.2 *1.6 = 0.32 60% 0.6635 0.21232 6 =0.32*1.6 = 0.512 40% 0.6112 0.3129 7 = 0.512 * 1.4 = 0.7168 40% 0.5631 0.4036 8 = 0.7168 * 1.4 = 1.00352 40% 0.5187 0.5205 9 = 1.00352 * 1.4 = 1.4043 6% 0.4779 0.6711 10 = 1.4043 * 1.06 = 1.4885 6% 0.4402 0.6552 10 P10 = 1.57787 / (8.55% - 6%) =61.8773 0.4402 27.2384 P0 = $ 30.158Related Questions
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