Week 5 DQ

Problem Set 1

Suppose the company is expected to pay a

divided of $2.5 and the required rate of return is 10% and
the growth rate is

4%. What is the price of the stock after 5 years? after 10
years? after 12

years?

Suppose the company just paid a divided of

$2.5 and the required rate of return is 10% and the growth
rate is 4%. What is

the price of the stock after 5 years? after 10 years? after
12 years?

ABCâ€™s stock is currently selling for $60

per share. The firm is expected to pay a dividend of $3.60.
If the cost of

equity is 9%, compute the growth rate.

Problem Set 2

Suppose the company just paid dividend of

$1. The dividends are expected to grow at 20% in Year 1 and
15% in Year 2.

After that, the dividends will grow at a constant rate of 5%
forever. If the

required rate of return is 10%, compute todayâ€™s price of the
stock.

Suppose the company just paid dividend of

$1. The dividends are expected to grow at 25% in Year 1 and
20% in Year 2, and

15% in Year 3. After that, the dividends will grow at a
constant rate of 5%

forever. If the required rate of return is 10%, compute
todayâ€™s price of the

stock.

Suppose the company will not pay any

dividends in Years 1 and 2. Suppose that the company pays
dividend of $1 in

Year 3 and after that the dividends will grow at 20% for the
next two years.

After that the dividends will grow at a constant rate of 5%
forever. If the

required rate of return is 10%, compute todayâ€™s price of the
stock.

Bottom of Form

Problem Set 3

ABC Industries will pay a dividend of

$2 next year on their common stock. The company predicts that
the dividend

will increase by 5% each year indefinitely. What is the
dividend yield if

the stock is selling for $50 a share? What is the required
rate of return?

The dividends are expected to grow at 7%

per year in the future. ABCâ€™s common stock sells for $23 per
share and its last

dividend was $2. What is the cost of equity? What is the
dividend yield?

Bottom of Form

Why is Do not included in Po (that is, why

is current dividend not included in current price)?

Because todayâ€™s stock price (Po) is present

value of all future expected dividends (not current and
future

dividends).

Also, another way of thinking of it is that

â€“ todayâ€™s price includes investorsâ€™ expectation of what their
stock is worth

for. If they receive dividends, then that part of the stock
price is already

received. So, there is no expectation of that dividend amount
anymore and

dividends received is not included in the price anymore.

Note that most stocks, it is difficult to

observe this in real-world data because

of the stock price movements on the trading

day for reasons other than the dividend effect. So, it is
difficult to isolate

the dividend effect from other factors affecting the stock
price. This is

especially true when the dividend paid constitutes a smaller
fraction of the

stock price.

determining ex-dividend price is

complicated because of the different tax rates and tax rule
that apply for

different investors

In November 2004, Microsoft paid special

dividends of $3 in addition to regular dividend of $0.08.
This was the largest

cash disbursement in history (the special dividend payment
amounted to $32.6 billion).

You can see it

here:
http://finance.yahoo.com/q/hp?s=MSFT&a=10&b=1&c=2004&d=11&e=31&f=2004&g=d

.

The closing price on Nov 12 was $29.97. The dividend paid was
$3.08. Given a

dividend tax of 15% (at that time), the after-tax dividend
would be 3.08*0.85 =

$2.618. The ex-dividend price would be around 29.97 â€“ 2.618 =
$27.35. On Nov 15th

(ex div date), the opening price was $27.34.

Bottom of Form

Week 5 DQ

Problem Set 1

Suppose the company is expected to pay a

divided of $2.5 and the required rate of return is 10% and
the growth rate is

4%. What is the price of the stock after 5 years? after 10
years? after 12

years?

Suppose the company just paid a divided of

$2.5 and the required rate of return is 10% and the growth
rate is 4%. What is

the price of the stock after 5 years? after 10 years? after
12 years?

ABCâ€™s stock is currently selling for $60

per share. The firm is expected to pay a dividend of $3.60.
If the cost of

equity is 9%, compute the growth rate.

Problem Set 2

Suppose the company just paid dividend of

$1. The dividends are expected to grow at 20% in Year 1 and
15% in Year 2.

After that, the dividends will grow at a constant rate of 5%
forever. If the

required rate of return is 10%, compute todayâ€™s price of the
stock.

Suppose the company just paid dividend of

$1. The dividends are expected to grow at 25% in Year 1 and
20% in Year 2, and

15% in Year 3. After that, the dividends will grow at a
constant rate of 5%

forever. If the required rate of return is 10%, compute
todayâ€™s price of the

stock.

Suppose the company will not pay any

dividends in Years 1 and 2. Suppose that the company pays
dividend of $1 in

Year 3 and after that the dividends will grow at 20% for the
next two years.

After that the dividends will grow at a constant rate of 5%
forever. If the

required rate of return is 10%, compute todayâ€™s price of the
stock.

Bottom of Form

Problem Set 3

ABC Industries will pay a dividend of

$2 next year on their common stock. The company predicts that
the dividend

will increase by 5% each year indefinitely. What is the
dividend yield if

the stock is selling for $50 a share? What is the required
rate of return?

The dividends are expected to grow at 7%

per year in the future. ABCâ€™s common stock sells for $23 per
share and its last

dividend was $2. What is the cost of equity? What is the
dividend yield?

Bottom of Form

Why is Do not included in Po (that is, why

is current dividend not included in current price)?

Because todayâ€™s stock price (Po) is present

value of all future expected dividends (not current and
future

dividends).

Also, another way of thinking of it is that

â€“ todayâ€™s price includes investorsâ€™ expectation of what their
stock is worth

for. If they receive dividends, then that part of the stock
price is already

received. So, there is no expectation of that dividend amount
anymore and

dividends received is not included in the price anymore.

Note that most stocks, it is difficult to

observe this in real-world data because

of the stock price movements on the trading

day for reasons other than the dividend effect. So, it is
difficult to isolate

the dividend effect from other factors affecting the stock
price. This is

especially true when the dividend paid constitutes a smaller
fraction of the

stock price.

determining ex-dividend price is

complicated because of the different tax rates and tax rule
that apply for

different investors

In November 2004, Microsoft paid special

dividends of $3 in addition to regular dividend of $0.08.
This was the largest

cash disbursement in history (the special dividend payment
amounted to $32.6 billion).

You can see it

here:
http://finance.yahoo.com/q/hp?s=MSFT&a=10&b=1&c=2004&d=11&e=31&f=2004&g=d

.

The closing price on Nov 12 was $29.97. The dividend paid was
$3.08. Given a

dividend tax of 15% (at that time), the after-tax dividend
would be 3.08*0.85 =

$2.618. The ex-dividend price would be around 29.97 â€“ 2.618 =
$27.35. On Nov 15th

(ex div date), the opening price was $27.34.

Bottom of Form

Week 5 DQ

Problem Set 1

Suppose the company is expected to pay a

divided of $2.5 and the required rate of return is 10% and
the growth rate is

4%. What is the price of the stock after 5 years? after 10
years? after 12

years?

Suppose the company just paid a divided of

$2.5 and the required rate of return is 10% and the growth
rate is 4%. What is

the price of the stock after 5 years? after 10 years? after
12 years?

ABCâ€™s stock is currently selling for $60

per share. The firm is expected to pay a dividend of $3.60.
If the cost of

equity is 9%, compute the growth rate.

Problem Set 2

Suppose the company just paid dividend of

$1. The dividends are expected to grow at 20% in Year 1 and
15% in Year 2.

After that, the dividends will grow at a constant rate of 5%
forever. If the

required rate of return is 10%, compute todayâ€™s price of the
stock.

Suppose the company just paid dividend of

$1. The dividends are expected to grow at 25% in Year 1 and
20% in Year 2, and

15% in Year 3. After that, the dividends will grow at a
constant rate of 5%

forever. If the required rate of return is 10%, compute
todayâ€™s price of the

stock.

Suppose the company will not pay any

dividends in Years 1 and 2. Suppose that the company pays
dividend of $1 in

Year 3 and after that the dividends will grow at 20% for the
next two years.

After that the dividends will grow at a constant rate of 5%
forever. If the

required rate of return is 10%, compute todayâ€™s price of the
stock.

Bottom of Form

Problem Set 3

ABC Industries will pay a dividend of

$2 next year on their common stock. The company predicts that
the dividend

will increase by 5% each year indefinitely. What is the
dividend yield if

the stock is selling for $50 a share? What is the required
rate of return?

The dividends are expected to grow at 7%

per year in the future. ABCâ€™s common stock sells for $23 per
share and its last

dividend was $2. What is the cost of equity? What is the
dividend yield?

Bottom of Form

Why is Do not included in Po (that is, why

is current dividend not included in current price)?

Because todayâ€™s stock price (Po) is present

value of all future expected dividends (not current and
future

dividends).

Also, another way of thinking of it is that

â€“ todayâ€™s price includes investorsâ€™ expectation of what their
stock is worth

for. If they receive dividends, then that part of the stock
price is already

received. So, there is no expectation of that dividend amount
anymore and

dividends received is not included in the price anymore.

Note that most stocks, it is difficult to

observe this in real-world data because

of the stock price movements on the trading

day for reasons other than the dividend effect. So, it is
difficult to isolate

the dividend effect from other factors affecting the stock
price. This is

especially true when the dividend paid constitutes a smaller
fraction of the

stock price.

determining ex-dividend price is

complicated because of the different tax rates and tax rule
that apply for

different investors

In November 2004, Microsoft paid special

dividends of $3 in addition to regular dividend of $0.08.
This was the largest

cash disbursement in history (the special dividend payment
amounted to $32.6 billion).

You can see it

here:
http://finance.yahoo.com/q/hp?s=MSFT&a=10&b=1&c=2004&d=11&e=31&f=2004&g=d

.

The closing price on Nov 12 was $29.97. The dividend paid was
$3.08. Given a

dividend tax of 15% (at that time), the after-tax dividend
would be 3.08*0.85 =

$2.618. The ex-dividend price would be around 29.97 â€“ 2.618 =
$27.35. On Nov 15th

(ex div date), the opening price was $27.34.

Bottom of Form

Week 5 DQ

Suppose the company is expected to pay a

divided of $2.5 and the required rate of return is 10% and
the growth rate is

4%. What is the price of the stock after 5 years? after 10
years? after 12

years?

Suppose the company just paid a divided of

$2.5 and the required rate of return is 10% and the growth
rate is 4%. What is

the price of the stock after 5 years? after 10 years? after
12 years?

ABCâ€™s stock is currently selling for $60

per share. The firm is expected to pay a dividend of $3.60.
If the cost of

equity is 9%, compute the growth rate.

Suppose the company just paid dividend of

$1. The dividends are expected to grow at 20% in Year 1 and
15% in Year 2.

After that, the dividends will grow at a constant rate of 5%
forever. If the

required rate of return is 10%, compute todayâ€™s price of the
stock.

Suppose the company just paid dividend of

$1. The dividends are expected to grow at 25% in Year 1 and
20% in Year 2, and

15% in Year 3. After that, the dividends will grow at a
constant rate of 5%

forever. If the required rate of return is 10%, compute
todayâ€™s price of the

stock.

Suppose the company will not pay any

dividends in Years 1 and 2. Suppose that the company pays
dividend of $1 in

Year 3 and after that the dividends will grow at 20% for the
next two years.

After that the dividends will grow at a constant rate of 5%
forever. If the

required rate of return is 10%, compute todayâ€™s price of the
stock.

Bottom of Form

ABC Industries will pay a dividend of

$2 next year on their common stock. The company predicts that
the dividend

will increase by 5% each year indefinitely. What is the
dividend yield if

the stock is selling for $50 a share? What is the required
rate of return?

per year in the future. ABCâ€™s common stock sells for $23 per
share and its last

dividend was $2. What is the cost of equity? What is the
dividend yield?

Bottom of Form

is current dividend not included in current price)?

Because todayâ€™s stock price (Po) is present

value of all future expected dividends (not current and
future

dividends).

Also, another way of thinking of it is that

â€“ todayâ€™s price includes investorsâ€™ expectation of what their
stock is worth

for. If they receive dividends, then that part of the stock
price is already

received. So, there is no expectation of that dividend amount
anymore and

dividends received is not included in the price anymore.

Note that most stocks, it is difficult to

observe this in real-world data because

of the stock price movements on the trading

day for reasons other than the dividend effect. So, it is
difficult to isolate

the dividend effect from other factors affecting the stock
price. This is

especially true when the dividend paid constitutes a smaller
fraction of the

stock price.

determining ex-dividend price is

complicated because of the different tax rates and tax rule
that apply for

different investors

In November 2004, Microsoft paid special

dividends of $3 in addition to regular dividend of $0.08.
This was the largest

cash disbursement in history (the special dividend payment
amounted to $32.6 billion).

You can see it

here:
http://finance.yahoo.com/q/hp?s=MSFT&a=10&b=1&c=2004&d=11&e=31&f=2004&g=d

.

The closing price on Nov 12 was $29.97. The dividend paid was
$3.08. Given a

dividend tax of 15% (at that time), the after-tax dividend
would be 3.08*0.85 =

$2.618. The ex-dividend price would be around 29.97 â€“ 2.618 =
$27.35. On Nov 15th

(ex div date), the opening price was $27.34.

Bottom of Form