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Preferred products has issued preferred stock with an

18/03/2021 Client: saad24vbs Deadline: 2 Day

DDM
Discount Dividend Model.
Q1. Gentleman Gym just paid its annual dividend of $3 per share, and it is widely expected that the dividend will increase by 5% per year indefinitely.
a. What price should the stock sell at if the discount rate is 15%?
Current Price $31.50 =3*(1+5%)/(15%-5%)
b. What price should the stock sell at if the discount rate is 12%.
Current Price $45.00 =3*(1+5%)/(12%-5%)
Q2. Arts and Crafts, Inc., will pay a dividend of $5 per share in 1 year. It sells at $50 a share, and firms in the same industry provide an expected rate of return of 14%. What must be the expected growth rate of the company’s dividends?
Expected growth rate 4.00% =14%-5/50
Yields
Yields. Income Gain and Capital Gain in DDM Model
Horse and Buggy Inc. is in a declining industry. Sales, earnings, and dividends will be all shrinking at a rate of 10% per year with the following financial data.
Input data.
Annual growth rate -10.00%
Required return 15%
DIV1 $3
a. what is the value of a share today?
Value of a share $12.00 =3/(15%+10%)
b. What price do you forecast for the stock next year?
Stock price 10.800 =3*(1-10%)/(15%+10%)
c. What rate of return should you expect if you buy the stock today and sell it in one year?
Expected rate of return 15.00% =15%
c-1. What is the income gain and the capital gain if you buy the stock today and sell it in one year?
Income gain (Dividend Yield) 25.00% =3/12
Capital gain (Investment Yield, g) -10.00% =-10%
Growth
Growth
Here are the forcasted data on two stocks of the year 1, both of which have discount rates of 15%:
a. What are the dividend payout ratios for each firm?
b. What are the expected dividend growth rates for each firm?
c. What is the proper stock price for each firm?
Stock A Stock B
Discount rate 15% 15%
Return on equity at year 1 15% 10%
Earnings per share at year 1 $2.00 $1.50
Dividends per share at year 1 $1.00 $1.00
a. Dividend payout ratio 50.00% 66.67% =1/1.5
b. Expected dividend growth 7.50% 3.33% =10%*(1-66.67%)
c. Stock price today $13.33 $8.57 = 1/(15%-3.33%)
PS valuation
Preferred Stock Valuation.
Preferred Products has issued preferred stock with an annual dividend of $8 that will be paid in perpetuity.
Input variables:
Annual dividend $8.00
Discount rate 12.00%
a. If the discount rate is 12%, at what price should the preferred sell?
Price0 $66.67 =8/12%
b. At what price should the stock sell 1 year from now?
Price1 $66.67 =8/12%
c. What is the dividend yield, the capital gains yield, and the expected rate of return of the stock?
Dividend yield 12% =8/66.67
Capital gains yield 0% =(66.67-66.67)/66.67
Rate of return 12% =

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