Tugas Chapter 10

Essential of Financial Management, 4rd Edition. Brighmam, E.F., dan Houston, J.F.
(2018).

Accounting and Finance, Kelompok 9

Mohammad Rizal 42P20018
Muhtar Rasyid 42P20019
Tugas Chapter 10, Case 10.21
Stocks and Their Valuation

10-21

a. Expected Dividends

2016 r = 12% 2017 2018 2019 2020 2021 2022

s
| g = 15% |
s
| | | | |

D0 = 1.75 D1 D2 D3 D4 D5 D6

Dt = D0(1 + g)t.

D2017 = $1.75(1.15)1 = $2.01.

D2018 = $1.75(1.15)2 = $1.75(1.3225) = $2.31
D2019 = $1.75(1.15)3 = $1.75(1.5209) = $2.66
D2020 = $1.75(1.15)4 = $1.75(1.7490) = $3.06
D2021 = $1.75(1.15)5 = $1.75(2.0114) = $3.52

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P̂2021
Tugas Chapter 10, Case 10.21
Stocks and Their Valuation

10-21
b. The price of the stock today
5
Dt
PV of dividends = 
t 1 (1  rs )
t
D D (1  g ) $3.52(1  0.05) $3.52(1.05) $3.70
Pˆ2021  2022  2021     $52.80
rs  g n rs  g n 0.12  0.05 0.12  0.05 0.07

PV of Price = $52.80/(1.12)5 = $29.96

PV D2017 = $2.01/(1.12)= $1.79
PV D2018 = $2.31/(1.12)2= $1.84 The price of the stock today is = $9.46 + $29.96
PV D2019 = $2.66/(1.12)3= $1.89
= $39.42
PV D2020 = $3.06/(1.12)4= $1.94
PV D2021 = $3.52/(1.12)5= $2.00

PV of dividends = $1.79 + $1.84 + $1.89+ $1.94+ $2.00

PV of dividends = $9.46

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P̂2021
Tugas Chapter 10, Case 10.21
Stocks and Their Valuation
10-21
c. Dividends yield, capital gains yield and total returns year 2017 and 2022

1) Dividends yield 2017 = D1/P0 = $2.01/$39.42 = 5.10%

Expected total return 2017 = Capital gains yield 2017 + Dividends yield 2017
12 % = Capital gains yield 2017 + 5.10%
Capital gains yield 2017 = 12% - 5.10%
Capital gains yield 2017 = 6.9%

2) Dividends yield 2022 = D6/P5

D2022 = D2021 (1+g) = $3.52 (1.05) = $3.70
P2021 = D2021 (1+g)ൗ𝑟−𝑔 = $3.70/0.07 = $52.8

Dividends yield 2022 = D6/P5 = $3.70/$52.8 = 7%

Expected total return 2022 = Capital gains yield 2022 + Dividends yield 2022
12 % = Capital gains yield 2017 + 7%
Capital gains yield 2022 = 12% - 7%
Capital gains yield 2022 = 5%

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Tugas Chapter 10, Case 10.21
Stocks and Their Valuation

10-21

d. Investor in high income tax brackets will be more inclined to purchase growth stocks to take the capital
gains and thus delay the payment of taxes until a later date. The firm’s stock is “mature” at the end of
2021

e. Since the firm’s supernormal and normal growth rates are lower, the dividends and, hence, the present
value of the stock price will be lower. The total return from the stock will still be 12%, but the dividend
yield will be larger and the capital gains yield will be smaller than they were with the original growth
rates. This result occurs because we assume the same last dividend but a much lower current stock price

f. As the required return increases, the price of the stock goes down, but both the capital gains and dividend
yields increase initially. Of course, the long-term capital gains yield is still 4%, so the long-term dividend
yield is 10%