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?
ABC’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 today’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 today’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 today’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. ABC’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 today’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
– today’s price includes investors’ 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 – 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?
ABC’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 today’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 today’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 today’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. ABC’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 today’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
– today’s price includes investors’ 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 – 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?
ABC’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 today’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 today’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 today’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. ABC’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 today’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
– today’s price includes investors’ 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 – 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?
ABC’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 today’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 today’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 today’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. ABC’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 today’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
– today’s price includes investors’ 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 – 2.618 = $27.35. On Nov 15th
(ex div date), the opening price was $27.34.
Bottom of Form































Answers

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