Posted: 4/9/2011 5:19:52 PM EDT
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I was asked to find the expected stock price Given: Annual Dividend $3.40 Future Dividend Growth 9% Firm faces Req'd Rate of Return 19% Extraordinary Div $29.50 not expected to affect future dividends (I assume the last part is not meaningful in calculation?) Thanks for any help... |
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Quoted: Look up "Dividend Discount Model" - that'll give you one answer. I keep finding that in my Google searches, but I'm either applying it wrong, or the homework software is not taking the right answer, or rounding funny. DDM gives me this formula:  Value of Stock=$3.40 / .19 - .09 = $34.00 ?? It doesn't like that answer |
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D 1 = Next Year's Dividend k = Capitalization Rate g = Dividend Growth Rate
when I look up Capitaliztion Rate, that appears to be the same as Rate of Return? This one asks for Next Year's Dividend, which would be $3.706 based on 9% dividend growth So, $3.706 / (.19 - .09) = $37.06 |
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Quoted: Quoted: Look up "Dividend Discount Model" - that'll give you one answer. I keep finding that in my Google searches, but I'm either applying it wrong, or the homework software is not taking the right answer, or rounding funny. DDM gives me this formula: http://i.investopedia.com/inv/dictionary/terms/ddm.gif Value of Stock=$3.40 / .19 - .09 = $34.00 ?? It doesn't like that answer Like I said, it's "one" answer. It can be used to reality check other approaches. Since your homework software seems to have a preferred answer, you need to use the same model on which the software is basing its answer. So, what did you study in class this week?  |
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Quoted: Quoted: Quoted: Look up "Dividend Discount Model" - that'll give you one answer. I keep finding that in my Google searches, but I'm either applying it wrong, or the homework software is not taking the right answer, or rounding funny. DDM gives me this formula: http://i.investopedia.com/inv/dictionary/terms/ddm.gif Value of Stock=$3.40 / .19 - .09 = $34.00 ?? It doesn't like that answer Like I said, it's "one" answer. It can be used to reality check other approaches. Since your homework software seems to have a preferred answer, you need to use the same model on which the software is basing its answer. So, what did you study in class this week? That's just it... it's online, and the chapter on this question is very, very brief. I'll get them posted shortly This is the entire Chptr:  |
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The average dividend of the S&P 500 stocks is about 1.7%. You can base it on that.
http://indexarb.com/dividendYieldSortedsp.html I agree that it's a trick question. Just make certain you have some sort of logical answer. |
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Quoted: The expected rate of return would include current dividend + dividend growth + expected stock price growth over a particular time period.when I look up Capitaliztion Rate, that appears to be the same as Rate of Return? This one asks for Next Year's Dividend, which would be $3.706 based on 9% dividend growth So, $3.706 / (.19 - .09) = $37.06 The IRR of exactly when the special dividend is paid would have to be taken into account. PLUS, when a dividend is paid out, the stock price is adjusted specifically for the payout, ie, if the stock is $ 30 now, and a $25 dividend is paid out, the new first stock price is $5. The future expected value of that $5 needs then to be adjusted for the other factors. |
switch to economics. Our ability to abstract things to levels which have no practical use negate the need for such useful things. E[ x ]=p1x1+p2x2+...+pnxn where p is the probability of a certain state of the world and x is the stock value in that state. I have never taken finance, and have no idea how you would derive a stock price from the given information. Even so, I don't see how dividends relate to the expected value of stock. But then again, I've never taken finance. |
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Quoted:
switch to economics. Our ability to abstract things to levels which have no practical use negate the need for such useful things.
E[ x ]=p1x1+p2x2+...+pnxn where p is the probability of a certain state of the world and x is the stock value in that state. I have never taken finance, and have no idea how you would derive a stock price from the given information. Even so, I don't see how dividends relate to the expected value of stock. But then again, I've never taken finance. A DIV is a disbursement of a firms capital. So after the DIV is paid out, the company now has a lower capital position (assets are reduced). Thus the price/value of the company's stock should also drop to account for this change. This drop is usually approximately the same amount as the DIV per share (the market does some weird shit sometimes that results in exceptions). Hopefully that helps. 
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