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FIN20150 Chapter Notes - Chapter 8: Steady-State Economy, Computer Network, Preferred Stock

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fuchsiahound508
2 Dec 2016
School
ND
Department
Finance
Course
FIN20150
Professor
Ackermann Carl

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Document Summary

The price of the stock today = the present value of all future dividends. Growing perpetuity: an asset with cash flows that grow at a constant rate forever. Dividend growth model: a model that determines the current price of a stock as its dividend next period divided by the discount rate less the dividend growth rate. If the growth rate is bigger than the discount rate (denominator of equation), then the stock price is infinitely large. Dividend yield: a sto(cid:272)k"s e(cid:454)pe(cid:272)ted (cid:272)ash di(cid:448)ide(cid:374)d di(cid:448)ided (cid:271)(cid:455) its (cid:272)urre(cid:374)t pri(cid:272)e. Capital gains rate: the dividend growth rate, or the rate at which the value of an investment grows. According to the dividend growth model: total return= dividend yield + capital gains yield. Forward pe ratio: a pe ratio that is based on estimated future earnings. Common stock: equity without priority for dividends or in bankruptcy. (cid:862)o(cid:374)e share, o(cid:374)e (cid:448)ote(cid:863) shareholders stake i(cid:374) a (cid:272)o(cid:373)pa(cid:374)(cid:455)"s de(cid:272)isio(cid:374)s.

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Related Questions

True or false:
-When using the Free Cash Flow method, the value of the entire firm is calculated. The amount of any LT debt must be subtracted from that value prior to calculating the stock's intrinsic value.
-Free Cash Flow is calculated in the same manner as is Cash Flow From Assets - it is the same value.
-The formula for the stock price using the dividend model with the non-growth assumption is = [ most recent dividend / Required Rate of Return]
-The formula for the stock price using the dividend model, constant growth assumption is = [most recent dividend / (Required Rate of Return - dividend growth rate)]
-The Required Rate of Return for a firm's stock is calculated with the CAPM. That Rate is also used as the Cost of Equity when calculating that firm's WACC.
-The formula for the constant growth dividend model implies that the return on a stock is composed of its dividend yield and dividend growth rate.

SCI just paid a dividend (D_0) of $3.60 per share, and its annual dividend is expected to grow at a constant rate (g) of 7.50% per year. If the required return (r_s) on SCI's stock is 18.75%, then the intrinsic value of SCI's shares is per share.
 
Which of the following statements is true about the constant growth model?
When using a constant growth model to analyze a stock, if an increase in the growth rate occurs while the required return remains the same, this will lead to a decreased value of the stock.
When using a constant growth model to analyze a stock, if an increase in the growth rate occurs while the required return remains the same, this will lead to an increased value of the stock.
 
Use the constant growth model to calculate the appropriate values to complete the following statements about Super Carpeting Inc.:
 
a. If SCI's stock is in equilibrium, the current expected dividend yield on the stock will be_________ per share.
b. SCI's expected stock price one year from today will be_________ per share.
c. If SCI's stock is in equilibrium, the current expected capital gains yield on SCI's stock will be______?

 

Storico Co. just paid a dividend of $1.50 per share. The company will increase its dividend by 20 percent next year and will then reduce its dividend growth rate by 5 percentage points per year until it reaches the industry average of 5 percent dividend growth, after which the company will keep a constant growth rate forever. If the stock price is $24.94, what required return must investors be demanding on Storico stock? (Hint: Set up the valuation formula with all the relevant cash flows, and use trial and error to find the unknown rate of return.)