Reading 42: Discounted Dividend Valuation-LOS b 习题精选 2011, interpret, discount, holding, periods

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Session 11: Equity Valuation: Industry and Company Analysis in a Global Context
Reading 42: Discounted Dividend Valuation

LOS b: Calculate and interpret the value of a common stock using the dividend discount model (DDM) for one-, two-, and multiple-period holding periods.

 

 

JAD just paid a dividend of $0.80. Analysts expect dividends to grow at 25% in the next two years, 15% in years three and four, and 8% for year five and after. The market required rate of return is 10%, and Treasury bills are yielding 4%. JAD has a beta of 1.4. The estimated current price of JAD is closest to:

A) $45.91.

B) $25.42.

C) $29.34.

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JAD’s stock price today can be calculated using the three-stage model. Start by finding the value of the dividends for the next four years with the two different dividend growth rates.

D₁ = D₀(1+g) = $0.80(1.25) = $1.00
D₂ = D₁(1+g) = $1.00(1.25) = $1.25
D₃ = D₂(1+g) = $1.25(1.15) = $1.4375
D₄ = D₃(1+g) = $1.4375(1.15) = $1.6531

(Alternatively, you could use your financial calculators to solve for the future value to find D1, D2, D3, and D4.)

Next find the value of the stock at the beginning of the constant growth period using the constant dividend discount model:

The easiest way to proceed is to use the NPV function in the financial calculator.

CF₀ = 0; CF₁ = 1.00; CF₂ = 1.25; CF₃ = 1.4375; CF₄ = 1.6531 + 40.57 = 42.22

I = 12.4; NPV = 29.34

The value of the firm today is $29.34 per share.

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An investor projects that a firm will pay a dividend of $1.25 next year, $1.35 the second year, and $1.45 the third year. At the end of the third year, she expects the asset to be priced at $36.50. If the required return is 12%, what is the current value of the shares?

A) $29.21.

B) $32.78.

C) $31.16.

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The current value of the shares is $29.21: V₀ = ($1.25 / 1.12) + ($1.35 / (1.12)²) + ($1.45 / (1.12)³) + ($36.50 / (1 + 0.12)³) = $29.21

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An investor projects that a firm will pay a dividend of $1.00 next year and $1.20 the following year. At the end of the second year, the expected price of the shares is $22.00. If the required return is 14%, what is the current value of the firm’s shares?

A) $18.73.

B) $15.65.

C) $19.34.

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The current value of the shares is $18.73:

V₀ = $1.00 / 1.14 + $1.20 / (1.14)² + $22.00 / (1.14)² = $18.73

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If a stock expects to pay dividends of $2.30 per share next year, what is the value of the stock if the required rate of return is 12% and the expected growth rate in dividends is 4%?

A) $29.90.

B) $19.17.

C) $28.75.

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Using the Gordon growth model, the value per share = DPS₁ / (r ? g) = 2.30 / (0.12 ? 0.04) = $28.75.

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Deployment Specialists pays a current (annual) dividend of $1.00 and is expected to grow at 20% for two years and then at 4% thereafter. If the required return for Deployment Specialists is 8.5%, the current value of Deployment Specialists is closest to:

A) $30.60.

B) $33.28.

C) $28.27.

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First estimate the amount of each of the next two dividends and the terminal value. The current value is the sum of the present value of these cash flows, discounted at 8.5%.