Stock Price Valuation



Chapter 8 - Stock Valuation

Zero Growth Dividends: Problem 15 on page 261

The concept of zero growth dividends model is that dividend will not grow, they are constant. In order words, there will be a constant non-growing dividend stream. Following is the formula for Zero Growth Dividends:

When company expects that dividend will grow after certain period than the following formula will be used:

Formula:

Price of stock = Divided / (Required rate of return - Growth rate)

P1 = D0 / (ke - g)

Since, this is Zero Growth Dividends, we will not be using next year dividend.

P1 = D0 / (ke - g)

P1 = $ 12/ (0.135 - 0.05)

P1 = $ 141.17

Now we will be discounting this amount to the present value (time 0 to 6 years)

$ 141.17/1.135^6 = $ 66.033

Constant Growth Dividends: Problems 1, 7 and 9 on page 260

The concept of constant dividend growth model is that dividends would be growing at a steady rate i.e. growth rate which is always less than required rate if return. The following formula is used for b)Constant Growth Dividends.

Problems 1:

Using Constant Growth Dividends Formal is as followed:

Dividend

1.45

Growth rate

6%

Required rate of return

11%

Price

?

The Jackson-Timberlake Wardrobe Co. stock, what is the current price?

Po

D1 = D0 ( 1 + g)

D1 = 1.45 (1 + 0.06)

D1 = 1.537

P0 = 1.537 / (0.12 - 0.06)

P0 = $ 25.616

Current price of the stock is $ 25.616

What will the price be in three year?

Expected Dividend

D1

1.537

D2

1.62922

D3

1.726973

D4

1.830592

D4 = D3 ( 1 + g)

P3 = D4 / ((ke - g)

P3 = 1.8305 / (0.12 - 0.06)

P3 = $30.508

Stock price in three years would be $30.508

What will the price be in 15 years?

Expected Dividend

D1

1.537

D2

1.62922

D3

1.726973

D4

1.830592

D5

1.940427

D6

2.056853

D7

2.180264

D8

2.31108

D9

2.449744

D10

2.596729

D11

2.752533

D12

2.917685

D13

3.092746

D14

3.278311

D15

3.475009

D16

3.68351

D15 = D16 (1 + g)

P15 = D16 / ((ke - g)

P15 = 3.683/ (0.12 - 0.06)

P15 = $ 61.39

Stock price in 15 years would be $ ...