LOS m: Calculate the value of common shares using the two-stage DDM, the H-model, and the three-stage DDM.
Q1. James Malone, CFA, covers GNTX stock, which is currently trading at $45.00 and just paid a dividend of $1.40. Malone expects the dividend growth rate to decline linearly over the next six years from 25% in the short run to 6% in the long run. Malone estimates the required return on GNTX to be 13%. Using the H-model, the value of GNTX is closest to:
A) $33.40.
B) $17.55.
C) $32.60.
Q2. An analyst has forecasted dividend growth for Triple Crown, Inc., to be 8% for the next two years, declining to 5% over the following three years, and then remaining at 5% thereafter. If the current dividend is $4.00, and the required return is 10%, what is the current value of Triple Crown shares based on a three-stage model?
A) $73.68.
B) $91.11.
C) $92.23.
Q3. An analyst has forecast that Hapex Company, which currently pays a dividend of $6.00, will grow at a rate of 8%, declining to 5% over the next two years, and remain at that rate thereafter. If the required return is 10%, based on an H-model what is the current value of Hapex shares?
A) $126.24.
B) $129.60.
C) $131.17.
Q4. A company’s stock beta is 0.76, the market return is 10%, and the risk-free rate is 4%. The stock will pay no dividends for the first two years, followed by a $1 dividend and $2 dividend, respectively. An investor expects to sell the stock for $10 at the end of four years. What price is an investor willing to pay for this stock?
A) $11.03.
B) $9.42.
C) $10.16.
Q5. An analyst has forecast that Apex Company, which currently pays a dividend of $6.00, will continue to grow at 8% for the next two years and then at a rate of 5% thereafter. If the required return is 10%, based on a two-stage model what is the current value of Apex shares?
A) $126.24.
B) $133.13.
C) $127.78.
Q6. An analyst has compiled the following financial data for ABC, Inc.:
ABC, Inc. Valuation Scenarios |
Item |
Scenario 1 |
Scenario 2 |
Scenario 3 |
Scenario 4 |
Year 0 Dividends per Share |
$1.50 |
$1.50 |
$1.50 |
$1.50 |
Long-term Treasury Bond Rate |
4.0% |
4.0% |
5.0% |
5.0% |
Expected Return on the S& 500 |
12.0% |
12.0% |
12.0% |
12.0% |
Beta |
1.4 |
1.4 |
1.4 |
1.4 |
g (growth rate in dividends) |
0.0% |
3.0% |
Years 1-3, g=12.0%
After Year 3, g=3.0% |
Year 1, g=20%
Year 2, g=18%
Year 3, g=16%
Year 4, g=9%
Year 5, g=8%
Year 6, g=7%
After Year 6, g=4% |
If year 0 dividend is $1.50 per share, the required rate of return of shareholders is 15.2%, what is the value of ABC, Inc.'s stock price using the H-Model? Assume that the growth in dividends has been 20% for the last 8 years, but is expected to decline 3% per year for the next 5 years to a stable growth rate of 5%.
A) $19.85.
B) $24.26.
C) $20.95. |