Valuation
(Note: The tables below have been written using formulas which allow you to alter the information or assumptions.)
1. Zero Growth (Constant Dividend) Model A. Solving for Price: V = D/k, where D = dividend and k = required return
What would an investor be willing to pay for a stock if she expected to receive a dividend of $2.50 each year indefinitely and her required return is 15%? D k V? 2.50 15.00% $ 16.67 $
B. Solving for Return:
k = D/V What rate of return would an investor expect if the current price of a stock is $119 and she expected the firm to pay a constant dividend of $4/year? V D k? $ 119.00 $ 4.00 3.4%
or assumptions.)
Valuation
(Note: The tables below have been written using formulas which allow you to alter the information or assumptions.)
1. Constant Growth Model A. Solving for Price: V = D0(1+g)/k-g = D1/(k-g) , where D0 = current dividend, k = required return, and g = growth rate What would an investor be willing to pay for a stock if she just received a dividend of $2.50, her required return is 15%, and she expected dividneds to grow at a rate of 5% per year. D0 k g V? $ 2.50 13.00% 4.00% $ 28.89
B. Solving for Return: k = D0(1+g)/V + g = D1/V + g What is my expected return on a stock that costs $26.50, just paid a dividend of $2.50, and has an expected growth rate of 5%? D0 V g k? $ 2.50 $ 26.25 5.00% 15.00%
assumptions.)
Valuation
(Note: The tables below have been written using formulas which allow you to alter the informatins or assumptions.)
1. Non-Constant Growth Model A. Solving for Price: This model involves the computation of year-to-year dividends which are then dicounted at the investors required rate of return. What would an investor be willing to pay for a stock if she just received a dividend of $2.50, her required return is 15%, and she expected dividneds to grow at a rate of 10% per year for the first two years, and then at a rate of 5% thereafter. Step 1: Compute the expected dividends during the first growth period. g D0 D1 D2 10.0% 2.50 2.75 3.03
$ $ $
Step 2: Compute the Estimated Value of the stock at the end of year 2 using the Constant Growth Model D2 k g V2? $ 3.03 15.00% 5.00% $ 31.76
Step 3: Compute the Present Value of all expected cash flows to find the price of the stock today. Cash Flow $ 2.75 $ 3.03 $ 31.76 PV at 15% $ 2.39 $ 2.29 $ 20.88 $ 25.56
1 D1 2 D2 3 V2? V0
?
Required Return
k = rf + (rm - Rf)B
Example:
If the rate of return on U.S. T-blls is 5%, and the expected return for the S&P 500 is 15%, what would be the required return for Microsoft with a beta 1.5, and Florida Power and Light with a beta of 0.8? MSFT 5.0% 15.0% 1.5 20.0% FPL 5.0% 15.0% 0.8 13.0%
rf rm B k?
Answer
(Note: When evaluating the impact of changes in variables, keep in mind that changes in the risk-free rate must be accompanied equivalent changes in the market return.