Question: 02 | Stock Valuation

1. Dividend Yield. Favored stock will pay a dividend this year of $3.50 per share. Its dividend yield is 9 percent. At what price is the stock selling?

2. Constant-Growth Model. Waterworks has a dividend yield of 11 percent. If its dividend is expected to grow at a constant rate of 6 percent, what must be the expected rate of return on the companys stock?

3. Rate of Return. Steady As She Goes, Inc., will pay a year-end dividend of $4.5 per share. Investors expect the dividend to grow at a rate of 5 percent indefinitely.

a. If the stock currently sells for $45 per share, what is the expected rate of return on the stock?

b. If the expected rate of return on the stock is 17 percent, what is the stock price?

4. Dividend Yield. BMM Industries pays a dividend of $3 per quarter. The dividend yield on its stock is reported at 6 percent. What price is the stock selling at?

5. Stock Values. Integrated Potato Chips paid a $4 per share dividend yesterday. You expect the dividend to grow steadily at a rate of 5 percent per year.

a. What is the expected dividend in each of the next 3 years?

b. If the discount rate for the stock is 15 percent, at what price will the stock sell?

c. What is the expected stock price 3 years from now?

d. If you buy the stock and plan to hold it for 3 years, what payments will you receive? What is the present value of those payments? Compare your answer to (b).