22) Consider four different stocks, all of which have a required retur

QUESTION

22) Consider four different stocks, all of which have a required return of 19% and a most recent dividend of $4.50 per share. Stocks W, X, and Y are expected to maintain constant growth rates in dividends for the foreseeable future of 10%, 0%, and -5% per year, respectively. Stock Z is a growth stoc
Required rate of return = 19% Recent dividend paid (D0) = $4.50 per share Stocks W,X,Y are expected to maintain constant growth rates in dividends for the foreseeable future of 10%, 0% and -5% per year respectively. Stock Z is a growth stock that will increase its dividend by 20% for the next two years and then maintain a constant 12% growth rate thereafter. Dividend yield = [Current dividend payment / Current stock value per share] Calculating Current stock value per share of Stock W: Stock W (P0) = [D0 (1 g) / (R g)] D0 = $4.50 D1 = $4.50 (1 0.10) D1 = $4.95 per share Required rate of return (R) = 19% Dividend growth rate (g) = 10% Stock W (P0) = [D0 (1 g) / (R g)] Stock W (P0) = [$4.95 / (0.19 0.10)] Stock W (P0) = [$4.95 / 0.09] Stock W (P0) = $55 per share Calculating Current stock value per share of Stock X: Stock X (P0) = [D0 (1 g) / (R g)] D0 = $4.50 D1 = $4.50 (1 0.0) D1 = $4.50 per share Required rate of return (R) = 19% Dividend growth rate (g) = 0% Stock X (P0) = [D0 (1 g) / (R g)] Stock X (P0) = [$4.50 / (0.19 0.00)] Stock W (P0) = [$4.50 / 0.19] Stock X (P0) = $23.68 per share Calculating Current stock value per share of Stock Y: Stock W (P0) = [D0 (1 g) / (R g)] D0 = $4.50 D1 = $4.50 (1 (-0.05) D1 = $4.275 per share Required rate of return (R) = 19% Dividend growth rate (g) = -5% Stock Y (P0) = [D0 (1 g) / (R g)] Stock Y (P0) = [$4.275 / (0.19 (-0.05)] Stock Y (P0) = [$4.275 / 0.24] Stock Y (P0) = $17.81 per share Calculating Current stock

ue per share of Stock Z: Dividend growth rate = 20% for the next two years and then maintain a constant 12% growth rate thereafter. Required rate of return = 19% Recent dividend paid (D0) = $4.50 per share Dividend paid in 1st year (D1) = D0 (1 g) Dividend paid in 1st year (D1) = $4.50 (1 0.20) Dividend paid in 1st year (D1) = $5.40 Dividend paid in 2nd year (D2) = $5.40 (1 0.20) Dividend paid in 2nd year (D2) = $6.48 per share Dividend paid in 3rd year (D3) = $6.48 (1 0.12) Dividend paid in 3rd year (D3) = $7.2576 per share Dividend paid in 4th year (D4) = $7.2576 (1 0.12) Dividend paid in 4th year (D4) = $8.1285 per share Current stock value of Z (P0) = [D1 / (1 R)1 D2 / (1 R)2 D3 / (1 R)3 P3 / (1 R)3] P3 = D4 / (R g) P3 = [$8.1285 / (0.19 0.12)] P3 = [$8.1285 / 0.07] P3 = $116.12 Current stock value of Z (P0) = [$5.40 / (1 0.19)1 $6.48 / (1 0.19)2 $7.2576 / (1 0.19)3 $116.12 / (1 0.19)3] Current stock value of Z (P0) = [$4.54 $4.57 $4.31 $68.91] Current stock value of Z (P0) = $82.36 Current stock value of Z (P0) = $82.36 per share Calculating Current Dividend Yields of Stock W X Y and Z: Dividend Yield = [Dividend payment / Current stock value per share] Dividend yield of Stock W = [$4.50 / $55] Dividend yield of Stock W = 0.0818 (or) 8.18% Dividend yield of Stock W = 8.18% Required rate of return = [Dividend yield Capital gains yield] [Dividend yield Capital gains yield] = Required rate of return Capital gains yield = required rate of return Dividend yield Capital gains yield = 19% 8.18% Capital gains yield = 10.82% Capital gains yield of Stock W = 10.82% Dividend yield of Stock X = [$4.50 / $23.68] Dividend yield of Stock X = 0.1900 (or) 19% Dividend yield of Stock X = 19% Capital gains yield of Stock X = 19% 19% Capital gains yield Stock X = 0% Dividend yield of Stock Y = [$4.50 / $17.81] Dividend yield of Stock Y = 0.2526 (or) 25.26% Capital gains yield of Stock Y = 19% 25.26% Capital gains yield of Stock Y = -6.26% Capital gains yield of Stock Y = -6.26% Dividend yield of Stock Z = [$4.50 / $82.36 per share] Dividend yield of Stock Z = 0.054638 (or) 5.46% Capital gains yield of Stock Z = [19% 5.46%] Capital gains yield of Stock Z = 13.54% Capital gains yield of Stock Z = 13.54%

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