Q1.

The value of any financial asset depends on the present value of future cash flows to be
received from such an asset by the investor. When investment is made in share, investor
is going to receive cash flows in the form of dividends. Hence the value of share depends
on the present value of such dividends.

Q2.

Shareholders will prefer to receive dividends from the company in which they have
invested. However, if the company is having more growth potential for the same reason,
they reinvest the earning into the business rather than paying out as dividend.
In this case, investors will be aware about the growth and related benefits to the
company. If the company grows, the earnings of the company will grow which in turn
will increase the value of the stock held by the shareholders in the form of dividend at a
future date.
The reason behind holding a stock by a shareholder given that it does not pay dividend to
the shareholders is that such stock depicts potential to provide capital appreciation to the
investor.
Hence the reason for holding such stock is capital appreciation which considered as most
optimistic approach for investing.
 Q3.

A company that is still growing rapidly usually would not pay dividends because it
wants to invest as much as possible into further growth.

Also mature firms that believe they can increase value by reinvesting their earnings will
choose not to pay dividends. The Investor of these mature firms do not expect from the
company to pay dividends and therefore the share price of these companies does not get
affected by dividend payments.

Q6.

The dividend yield is the income component of a stock. s return stated on a percentage
basis. It is one of the two components of total return. Dividend yield typically is
calculated as the most recent 12-month dividend divided by the current market price.
The payout ratio is the ratio of dividends to earnings. It indicates the percentage of a firm.
s earnings paid out in cash to its stockholders. The complement of the payout ratio, or
(1.0 . payout ratio), is the retention ratio, and it indicates the percentage of a firm. s
current earnings retained by it for reinvestment purposes.
The two components are the dividend yield and the capital gains yield. For most
companies, the capital gains yield is larger. This is easy to see for companies that pay no
dividends. For companies that do pay dividends, the dividend yields are rarely over five
percent and are often much less.
The dividend growth model makes the implicit assumption that the stock price will grow
at the same constant rate as the dividend. What this means is that if the cash flows on an
investment grow at a constant rate through time, the value of that investment grows at the
same rate as the cash flows.

EX15.

Here we have a stock that pays no dividend for 10 years. once the stock begins
paying dividend it will have a constant growth rate of dividend. We can use the
constant growth model at the point .it is important to remember that general
constant growth model formula is:
Pt = [Dt *( 1+g)]/ (r- g)
So the price of the stock in year 9 will be:
P9 =$14.00 / 0.14- 0.06 =$175
The price of the stock today is simply the PV of the stock price in the future. we
simply discount the future stock price at the required return .the price of stock
today will be:
P0 = $175 / (1.14)9
P0= $175/3.252 =$ 53.81
EX16.

First year dividend D1=3.5+4.5=8.0

SECOND YEAR dividend D2=8.0+4.5=12.5
D3=12.5+4.5=17
D4=17+4.5=21.5
D5=21.5+4.5=26
Compute the current stock price, P₀, if first year dividend, D₁ is $8.00, second
year dividend, D₂ is $12.50, third year dividend, D₃ is $17.00, fourth year
dividend, D₄ is $21.50, fifth year dividend, D₅ is $26.00, and rate of return, R is
11%.
D₁ D₂ D3 D4 D5
P₀ = 1 + 2 + 3 +
¿+
(1+ R) (1+ R) (1+ R) 1+ R ¿ 4
(1+ R)5
 $ 8.00 $ 12.50 $ 17.00 $ 21.50 $ 26.00
P₀ = 1 + 2 + 3 + 4 + 5
(1+11%) (1+11 %) (1+11 %) (1+11) (1+11 %)
$ 8.00 $ 12.50 $ 17.00 $ 21.50 $ 26.00
P₀ = 1.11 + 1.2321 + 1.368 + 1.518 + 1.685

P₀ = $7.21 + $10.145 + $12.427 + $14.163 + $15.43

P₀ = $59.375
EX17.

Computer the stock price in year 4, P4, if current dividend, D4 is $2.75, constant
growth rate of dividend, g is 5%, and rate of return R is 12%.
D5
P4 =
R−g
B 4∗( 1+ g ) $ 2.75∗( 1+ 0.05)
= = = $41.25
R−g 0.12−0.05
Computer the current stock price, P0. If stock price in year 4, P4 is $41.25
-> first year dividend D1 is $13; second year dividend D2 is $9; third year dividend
D3 is $6; fourth year dividend D4 is $2.75 and rate of return R is 12%.
D1 D2 D3 D4 P4
P0 = 1 + 2 + 3 + 4 +
( 1+ R ) ( 1+ R ) ( 1+ R ) ( 1+ R ) ( 1+ R )4

$ 13 $9 $6 $ 2.75 $ 41.25
= 1 + 2 + 3 + 4 +
( 1+ 0.12 ) ( 1+ 0.12 ) ( 1+ 0.12 ) ( 1+ 0.12 ) ( 1+ 0.12 )4

$ 13 $9 $6 $ 2.75 $ 41.25
= 1.12 + 1.2544 + 1.405 + 1.57 + 1.57

= $11.61 + $7.17 + $4.27 + $1.75 + $26.27 = $51.07

EX18.

D1=(2.15*1.3)=2.795
D2=(2.795*1.3)=3.6335
D3=(3.6335*1.3)=4.72355
Value after year 3 =(D3*Growth rate)/(Required return-Growth rate)
=(4.72355*1.04)/(0.11-0.04)
=$70.18
Hence current share price=Future dividends*Present value of discounting
factor(11%,time period)
=2.795/1.11+3.6335/1.11^2+4.72355/1.11^3+$70.18/1.11^3 =$60,23

EX20.

The purchars price of a listed stock bought over a stock exchange is referred to as
stock price.
Determine the current price:
P0 of Corporation AR stock
If current dividend, D0 is $10.25, negative growth rate of dividend,
g is 3% and rate of return, R is o.095
D0∗(1+ g)
We have: P0 =
R−g
$ 10.25∗(1−0.03)
= 0.095−(−0.03 ) ¿
¿
$ 9.9425
= 0.125 = $79.54

EX21.
S C currently trades at $68 per share. The required rate as return as expected from
the market is 11percent and the dividends grow at the rate of 3.75percent. The
dividend paid by the stock are computed as follows:
We have:
Pt = Dt+1 / R-g
D0∗(1+ 0.0375)
$68=
0.11−0.0375
$ 68∗0.0725 $ 4.93
D0= 1.0375
= 1.0375
= $4.725

22.
Compute stock price in 19 years, P19 if perpetual dividend, D is $20, and rate of
return, R is 5.35%
 D
P19 =
R
$ 20
= 5.35 %

= $373.83
Compute current stock price, P₀ if price in 19 years, P19 is $373.83(from step 1),
and rate of return, R is 5.35%
P19
P₀ =
(1+ R)19
$ 373.83
=
(1+5.35)19
$ 373.83
= 2.692

= $138.87