FIN325 -Leighton November 15, 2017 Exam 2 (Chapters 4-7) Name: 4. (30 POINTS) Ac
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Question
FIN325 -Leighton November 15, 2017 Exam 2 (Chapters 4-7) Name: 4. (30 POINTS) According of ward Corporation common stock for the next three years is expected to be 10%. Jus to the most recent Value Line Investment Survey, the growth rate in dividends t last year, ward Corporation paid a $2.00 dividend on their common stock. Further, after Year 3, Ward Corporation dividend is expected to grow at 6% into perpetuity. Investors in Ward Corporation expect a r 19%. Given the above information, what should be the price of ward Corporation's common stoc POINTS)? Also, what is the current expected Dividend Yield and the expected Capital Gains Yield for Ward Corporation (5 POINTS)? eturn of k (25Explanation / Answer
From the given information
D0 = 2
D1 = 2*1.1 = 2.2
D2 = 2.2*1.1 = 2.42
D3 = 2.42*1.1 = 2.662
D4 = 2.662*1.06 = 2.822
According to dividend-discount model,
P0 = D1/(R-G)
P0 = Current stock price
D1 - Dividend at t =1
R - Required rate
G - Growth rate
P3 = D4/(R-g) = 2.8217/(0.19-0.06) = 21.71
To find the present value, discount the future dividends and P3
P0 = 2.2/(1+0.19)^1 + 2.42/(1+0.19)^2 + 2.662/(1+0.19)^3 + 21.71/(1+0.19)^3 = 18.02
Current stock price = $18.02
Dividend yield = Current dividend/Share price = 2/18.02 = 0.1110 = 11.10%
Capital gains yield = Required rate - dividend yield = 0.19 - 0.1110 = 0.0790 = 7.90%
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