3. Stock prices and intrinsic values Aa Aa E Benjamin Graham, the father of value investing, once said, "In the short run, the market is a voting machine, but in the long run, the market is a weighing machine." In this quote, Benjamin Graham was referring to the key difference between the "price" and the "value" of a security. In November 2006, Citigroup's stock (NYSE: C) was trading at $49.59. Following the credit crisis of 2007-2008 and by the end of October 2009, Citigroup's stock price had plummeted to $4.27. Several banks went under, and others saw their stock prices lose more than 60% of their value. Based on your understanding of stock prices and intrinsic values, which of the following statements is true? O A stock's intrinsic value is based only on the perceived risk of a stock. A stock's intrinsic value is based on true investor returns. You can estimate the value of a company's stock using models such as the corporate valuation model and the dividend discount model. Which of the following companies would you choose to evaluate if you were using the discounted dividend model to estimate the value of the company's stock? O A company that is in a high-growth stage and plans to retain all its earnings for the next few years to support its growth A company that has been distributing a portion of their earnings every quarter for the past six years O 4. Expected dividends as a basis for stock values Aa Aa E The following graph shows the value of a stock's dividends over time. The stock's current dividend is $1.00 per share, and dividends are expected to grow at a constant rate of 2.70% per year. The intrinsic value of a stock should equal the sum of the present value (PV) of all of the dividends that a stock is supposed to pay in the future, but many people find it difficult to imagine adding up an infinite number of dividends. Calculate the present value (PV) of the dividend paid today (Do) and the discounted value of the dividends expected to be paid 10 and 20 years from now (D10 and Dzo). Assume that the stock's required return (rs) is 8.40%. Note: Carry and round the calculations to four decimal places. Time Period Dividend's Expected Expected Dividend's Future Value Present Value Now End of Year 10 End of Year 20 End of Year 50 Using the red curve (cross symbols), plot the present value of each of the expected future dividends for years 10, 20, and 50. The resulting curve will illustrate how the PV of a particular dividend payment will decrease depending on how far from today the dividend is expected to be received. Note: Round each of the discounted values of the of dividends to the nearest tenth decimal place before plotting it on the graph. You can mouse over the points in the graph to see their coordinates. DIVIDENDS ($) 5.00 Discounted Dividends FV of Dividends PV of Dividends 0.00 0 10 20 30 40 50 60 YEARS Clear All 5. Constant growth stocks Aa Aa E SCI just paid a dividend (De) of $2.88 per share, and its annual dividend is expected to grow at a constant rate (9) of 6.00% per year. If the required return (rs) on SCI's stock is 15.00%, then the intrinsic value of SCI's shares is per share. Which of the following statements is true about the constant growth model? The constant growth model implies that dividends remain constant from now to a certain terminal year. The constant growth model implies that dividend growth remains constant from now to infinity. Use the constant growth model to calculate the appropriate values to complete the following statements about Super Carpeting Inc.: If SCI's stock is in equilibrium, the current expected dividend yield on the stock will be per share. SCI's expected stock price one year from today will be per share. If SCI's stock is in equilibrium, the current expected capital gains yield on SCI's stock will be 3. Stock prices and intrinsic values Aa Aa E Benjamin Graham, the father of value investing, once said, "In the short run, the market is a voting machine, but in the long run, the market is a weighing machine." In this quote, Benjamin Graham was referring to the key difference between the "price" and the "value" of a security. In November 2006, Citigroup's stock (NYSE: C) was trading at $49.59. Following the credit crisis of 2007-2008 and by the end of October 2009, Citigroup's stock price had plummeted to $4.27. Several banks went under, and others saw their stock prices lose more than 60% of their value. Based on your understanding of stock prices and intrinsic values, which of the following statements is true? O A stock's intrinsic value is based only on the perceived risk of a stock. A stock's intrinsic value is based on true investor returns. You can estimate the value of a company's stock using models such as the corporate valuation model and the dividend discount model. Which of the following companies would you choose to evaluate if you were using the discounted dividend model to estimate the value of the company's stock? O A company that is in a high-growth stage and plans to retain all its earnings for the next few years to support its growth A company that has been distributing a portion of their earnings every quarter for the past six years O 4. Expected dividends as a basis for stock values Aa Aa E The following graph shows the value of a stock's dividends over time. The stock's current dividend is $1.00 per share, and dividends are expected to grow at a constant rate of 2.70% per year. The intrinsic value of a stock should equal the sum of the present value (PV) of all of the dividends that a stock is supposed to pay in the future, but many people find it difficult to imagine adding up an infinite number of dividends. Calculate the present value (PV) of the dividend paid today (Do) and the discounted value of the dividends expected to be paid 10 and 20 years from now (D10 and Dzo). Assume that the stock's required return (rs) is 8.40%. Note: Carry and round the calculations to four decimal places. Time Period Dividend's Expected Expected Dividend's Future Value Present Value Now End of Year 10 End of Year 20 End of Year 50 Using the red curve (cross symbols), plot the present value of each of the expected future dividends for years 10, 20, and 50. The resulting curve will illustrate how the PV of a particular dividend payment will decrease depending on how far from today the dividend is expected to be received. Note: Round each of the discounted values of the of dividends to the nearest tenth decimal place before plotting it on the graph. You can mouse over the points in the graph to see their coordinates. DIVIDENDS ($) 5.00 Discounted Dividends FV of Dividends PV of Dividends 0.00 0 10 20 30 40 50 60 YEARS Clear All 5. Constant growth stocks Aa Aa E SCI just paid a dividend (De) of $2.88 per share, and its annual dividend is expected to grow at a constant rate (9) of 6.00% per year. If the required return (rs) on SCI's stock is 15.00%, then the intrinsic value of SCI's shares is per share. Which of the following statements is true about the constant growth model? The constant growth model implies that dividends remain constant from now to a certain terminal year. The constant growth model implies that dividend growth remains constant from now to infinity. Use the constant growth model to calculate the appropriate values to complete the following statements about Super Carpeting Inc.: If SCI's stock is in equilibrium, the current expected dividend yield on the stock will be per share. SCI's expected stock price one year from today will be per share. If SCI's stock is in equilibrium, the current expected capital gains yield on SCI's stock will be