Suppose that D0=$1.00 and the stock's last closing price is $26.25. It is expected that earnings and dividends will grow at a constant rate of 8=5.00% per year and that the stock's price will grow at this same rate. Let us assume that the stock is fairly priced, that is, it is in equilibrium and the most appropriate required rate of return is r1=9.00%. The dividend recelved in period 1 is D1=$1.00(1+0.0500)=$1.05 and the estimated intrinsic value in the same period is based on the constant growth model: P1=1RD2. Using the same logic, compute the dividends, prices, and the present value of each of the dividends at the end of each period. The dividend yield for period 1 is and it will each period. The capital gain yield expected during period 1 is and it will each period. If it is forecasted that the total return equals 9.00% for the next 5 years, what is the forecasted total return out to infinity? 4.00% 5.00% 9.00% The dividend yield for period 1 is and it will each period. The capital gain yleld expected during period 1 is and it will each period. If it is forecasted that the total return equals 9.00% for the next 5 years, what is the forecasted total return out to infinity? 4.00%5.00%9.00%14.00% Note that this stock is called a "Hold" as its forecasted intrinsic value is equal to its current price P0=ffRD1=0.09000.050051.05=$26.25 and the expected total return is equal to the required rate of return rs. If the market was more optimistic and the growth rate would be 6.00% rather than 5.00%, the stock's forecasted intrinsic value would be P0=0.0900.0.060s.05=$35.00, which is greater than $26.25. In this case, you would call the stock a "Buy". Suppose that the growth rate is expected to be 3.00%. In this case, the stock's forecasted intrinsic value would be price, and the stock would be a Step 2t Learni Constant Growth Valuation Watch the following video for an example, then answer the question that follows. Suppose D0=1 and D1=$1.05 and it is expected that earnings and dividends will grow at a constant rate of 5.00% per year and that the stock's price will grow at this same rate. Let us assume that the stock is fairly priced and the required rate of return is 9.00%. When the growth rate is years from today the required rate of retum, you can use the following formula to calculate the price of the stock 4 P0(grs)4(1+b4D1rRD1P0(1+g)4 And the price of the stock 4 years from today is Suppose D0=1 and D1=$1.05 and it is expected that earnings and dividends will grow at a constant rate of 5.00% per year and that the stock's price will grow at this same rate. Let us assume that the stock is fairly priced and the required rate of return is 9.00%. When the growth rate is years from today the required rate of return, you can use the following formula to calculate the price of the stock 4 P0(gr3)4(1+g)1D1r1rD1P0(1+g)4lessthangreaterthan And the price of the stock 4 years from today is
