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  • K D K D K D K D V: Muqaddas Zubair

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    Mahlab Rajpoot
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    The document contains 3 investment analysis questions that are answered using dividend discount models. 1) For a stock paying $2 dividends growing at 20% for 3 years then 8% indefinitely, the stock price is $36.31. 2) For XYZ stock with $5 dividends growing 10% for 3 years then 5% indefinitely, the stock price is $85.503. 3) For Thirsty Cactus stock paying $1.25 dividends growing 28% for 8 years then 6% indefinitely, the stock price is $69.263.

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    3rd assignment

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    The document contains 3 investment analysis questions that are answered using dividend discount models. 1) For a stock paying $2 dividends growing at 20% for 3 years then 8% indefinitely, the stock price is $36.31. 2) For XYZ stock with $5 dividends growing 10% for 3 years then 5% indefinitely, the stock price is $85.503. 3) For Thirsty Cactus stock paying $1.25 dividends growing 28% for 8 years then 6% indefinitely, the stock price is $69.263.

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    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
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    35 views5 pages

    K D K D K D K D V: Muqaddas Zubair

    Uploaded by

    Mahlab Rajpoot
    The document contains 3 investment analysis questions that are answered using dividend discount models. 1) For a stock paying $2 dividends growing at 20% for 3 years then 8% indefinitely, the stock price is $36.31. 2) For XYZ stock with $5 dividends growing 10% for 3 years then 5% indefinitely, the stock price is $85.503. 3) For Thirsty Cactus stock paying $1.25 dividends growing 28% for 8 years then 6% indefinitely, the stock price is $69.263.

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    © All Rights Reserved
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    of 5

    Name Muqaddas Zubair

    Roll # 32

    Security Analysis & Portfolio Management

    Assignment # 3

    Question 1

    The Brigapenski Co. has just paid a cash dividend of $2 per share. Investors
    require a 16 percent return from investments. What would the stock sell for today
    if the dividend was expected to grow at 20 percent per year for the next three years
    and then settle down to 8 percent per year, indefinitely?

    Answer
    The last dividend was $2 per share k= 16%
    Years growth rate
    1-3 20%
    4 and so 8%
    First, the dividend in 4 years will be...

    D1= D0 (1+g) = 2(1+0.20) = 2.4


    D2 = D1 (1+g) = 2.4(1+0.20) = 2.88
    D3 = D2 (1+g) = 2.88(1 +0.20) = 3.456
    D4 = D3 (1+g) =3.456(1+0.08) = 3.73248

    Present value of 4 years will be...


    D1 D2 D3 D
    Vj     ... 
    (1  k ) (1  k ) 2 (1  k ) 3 (1  k ) 
    Pv = 2.4 + 2.88 + 3.456 + 3.73248
    1
    (1+0.16) (1+0.16)2 (1+0.16)3 (1+0.16)4
    = 2.068 + 2.140 + 2.214 + 2.061
    Pv = 8.483
    V3 = D4
    k-g
    = 3.73248
    0.16-0.08
    V = 46.656
    Selling price?

    D1 + D2 + D3 + FV
    (1+K)1 (1+K)2 (1+K)3 (1+k)3

    SP = 2.4 + 2.88 + 3.456 + 46.656


    1 2 3
    (1+0.16) (1+0.16) (1+0.16) (1+0.16)3

    = 2.068 + 2.140 + 2.214 + 29.89

    Selling price of this stock = 36.31

    Question 2
    You are planning to buy shares of XYZ. XYZ’s most recent annual dividend was $5
    per share. The next dividend will be paid in exactly one year. Analysts expect
    dividends to grow at a rate of 10% per year for three years (up to and including
    the t=3 dividend). Thereafter, dividends are expected to grow at a rate of 5% per
    year into the indefinite future. The required rate of return on XYZ’s stock is 12%.
    Calculate the value of XYZ stock using the two-stage dividend discount model.

    Answer
    value of XYZ stock using the two-stage dividend discount model
    D0 = $5 K = 12%
    Years growth rate
    1-3 10%
    4 so on 5%

    V= D1
    kg

    D1= D0 (1+g) = 5(1+0.1)= 5.5


    D2 = D1 (1+g) = 5.5(1+0.1) = 6.05
    D3 = D2 (1+g) = 6.05(1 +0.1) = 6.655
    D4 = D3 (1+g) =6.655(1+0.05) = 6.987

    Pv = D1 + D2 + D3 + TV
    (1+K)1 (1+K)2 (1+K)3 (1+k)3
    Pv = 5.5 + 6.05 + 6.655 + 99.825
    (1+0.12)1 (1+0.12)2 (1+0.12)3 (1+0.12)3

    4.9 + 4.82 + 4.73 + 71.053


    Pv = 85.503

    TV at year 3 = D4 = 6.98 = 99.825


    R-g 0.120.05

    Question 3
    Thirsty Cactus Corp. just paid a dividend of $1.25 per share. The dividends are
    expected to grow at 28 percent for the next eight years and then level off to a 6
    percent growth rate indefinitely. If the required return is 13 percent, what is the
    price of the stock today by using the two-stage dividend growth model?

    Answer
    We can use the two-stage dividend growth model for this , which is:

    D0 = 1.25 per share


    K= 13%
    Years growth rate
    1-8 28%
    9 so on 6%

    D1= D0 (1+g)= 1.25(1.28)=1.6


    D2 = D1 (1+g) =1.6(1.28) = 2.048
    D3 = D2 (1+g) = 2.048(1.28)= 2.62
    D4 = D3 (1+g) = 2.62(1.28)= 3.35
    D5 = D4 (1+g) = 3.35(1.28)= 4.28
    D6= D5 (1+g) = 4.28(1.28)= 5.48
    D7 = D6 (1+g) = 5.48(1.28)= 7.01
    D8= D7(1+g)= 7.011(1.28)=8.97
    D9 = D8(1+g)= 8.97(1.06)=9.5082

    TV8 = D9
    K-G

    = 9.508
    13%6%

    TV8 = 135.82

    price of the stock today by using the two-stage dividend growth model
    D1 D2 D3 D
    Vj     ... 
    (1  k ) (1  k ) (1  k )
    2 3
    (1  k ) 
    PV= 1.6 + 2.048 + 2.62 + 3.3 5
    (1+0.13)1 (1+0.13) 2
    (1+0.13) 3
    (1+0.13)4

    = 4.28 + 5.48 + 7.01 + 8.91 + 135.82


    5 6 7
    (1+0.13) (1+0.13) (1+0.13) (1+0.13)8 (1+0.13)8

    =
    1.415 + 1.608 + 1.815 + 2.06 + 2.32 + 2.63 + 2.98+ 3.37 + 51.09
    PV OF STOCK = 69.263

    ...................................................................

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