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Reading 41: Discounted Dividend Valuation- LOS m~ Q1-6

 

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.

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