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FINE 2000 Chapter 8: Chapter 8 – Stock Valuation

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crimsonant364
11 Feb 2017
School
York University
Department
Finance
Course
FINE 2000
Professor
Greg Chiykowski

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Document Summary

8. 1 common stock valuation: harder to value shares --, future cash flows are not known, unlimited life, no way to observe the rate of return, cash flow for shareholders. P0 = (d1 + p1) / (1 + r: need the price of the share in one year to determine the current price. If price is not known, basically the pv of a share is equal to the sum of pvs of all its dividend payments in the future years. What is the price: p0 = . 50 / (. 1 / 4) = . Constant dividend: the firm will pay a constant dividend forever, this is like preferred stock, the price is computed using the perpetuity formula. If growth rate exceed the discount rate --> the stock price will be infinitely large: the model becomes useless if g > r, the stock price will grow at the same constant rate as the dividend.

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Related Questions

Can you explain in simple and detail on what is stock valuation?

So far I have these points taken down but don't know the meaning to it

Value of a share of stock > the present value of its expected future cash flow

Cash Dividends paid (If any)

Future Selling Price of the Stock

The discount rate, i.e., risk-appropriate rate of return to be earned on the investment

A. IBIS Corporation has had dividends grow from $2.50per share to $6.50 per share over the last 10years (the $6.50 per share dividend was paid yesterday; that is, D0= $6.50). This compounded annual growth rate in dividends is expected to continue into the future forever. If the current market price of IBIS’s stock is $45.00 per share, what rate of return do investors expect to receive from buying IBIS stock?

B. Phillips, Inc. just paid a dividend of $3.25 per share on its common stock (that is, D0= 3.25). Investors expect the dividend to grow at 40% in years 1 and 2, they expect the dividend to grow at 20% in year 3 and they expect that all future dividends (that is, dividends in years 4, 5, ...,infinity) to grow at a constant rate of 5% per year. If the cost of capital for Phillips, Inc. stock is 15%, what is the current price of the stock?

--SHOW WORK PLEASE

A stock with a constant dividend growth rate of 5% is expected to make a $2 dividend in one year. If you require a 12% return on your investment, which of the following statements is INCORRECT?Note: P0 = D1/(R–g) or R = (D1/P0) + g.

A. The current stock price is $28.57. B. The dividend yield is 7%. C. The capital gains yield is 12%. D. The stock price will grow at an annual 5%.