From the Desk of Imran Omer

Stock and Their Valuation

 Expected Dividend for Year 1:
D 1=D0 ¿

 Expected Price for Year 1:

P1=P0 ¿

 Value (Price) of Stock by Constant Growth Model or Gordon Growth Model: The equation
used to find the value of a constant growth stock is:
D (1+ g) D1
^ 0= 0
Vs ¿ P =
k s −g k s−g

 Rate of Return on Common Stock (Cost of Common Stock):

^ D1
Ks= +g
Po
Note: Multiply answer by 100 to calculate percentage
 Value (Price) of Zero Growth Stock: A zero growth stock is one whose future dividends are not
expected to grow at all.
D
Vs= ^P 0=
ks

 Dividend Yield:
D1
DY = X 100
P0
 Capital Gain Yield:
P1−P 0
CGY = X 100
P0
 Value of Preferred Stock:
D ps
Vps=P0 of P s=
k ps
 Rate of Return on Preferred Stock (Cost of Preferred Stock):
^ D
K ps = ps
V ps
Note: Multiply answer by 100 to calculate percentage

Where,
D0 = Last dividend the company paid
g = Growth rate in both earnings and dividends
n = Number of years or period
ks = Stockholder’s required rate of return. This rate is used to discount the cash flows.
1. Warr Corporation-just paid a dividend of $1.50 a share (i.e., Do = $1.50). The dividend is expected
to grow 5 percent a year for the next 3 years, and then 10 percent a year thereafter. What is the
expected dividend per share for each of the next 5 years?
 From the Desk of Imran Omer

2. Thomas Brothers is expected to pay a $0.50 per share dividend at the end of the year (i.e., D 1 =
$0.50). The dividend is expected to grow at a constant rate of 7 percent a year. The required rate of
return on the stock, ks, is 15 percent, What is the value per share of the company's stock?

3. Max Corp is expected to pay a $1.80 per share dividend at the end of the year. The dividend
expected growth rate is 0 percent a year. The required rate of return on the stock, k s, is 12 percent,
What is the value per share of the company's stock?

4. Harrison Clothiers' stock currently sells for $20 a share. The stock just paid a dividend of $1.00 a
share (i.e., Do = $1.00). The dividend is expected to grow at a constant rate of 10 percent a year.
What stock price is expected 1 year from now? What is the required rate of return on the
company's stock?

5. Fee Founders has preferred stock outstanding which pays a dividend of$5 at the end of each year.
The preferred stock sells for $60 a share. What is the preferred stock's required rate of return?

6. Required rate of return (ks) = 12%

Last dividend = Rs. 2
Growth rate = 5% constant over the years
Required:
a. Current value of stock (Po)
b. Value of stock after 1 year (P1)
c. Dividend yield
d. Capital gain yield

7. A stock is trading at $80 per share. The stock is expected to have a year-end dividend of $4 per
share (D1 = 4), which is expected to grow at some constant rate g throughout time. The stock's
required rate of return is 14 percent. If you are an analyst who believes in efficient markets, what
would be your forecast of g?

8. You are considering an investment in the common stock of Keller Corp. The stock is expected to
pay a dividend of $2 a share at the end of the year (D 1 = $2.00). The stock has a beta equal to 0.9.
The risk-free rate is 5.6 percent, and the market risk premium is 6 percent. The stock's dividend is
expected to grow at some constant rate g. The stock currently sells for $25 a share. Assuming the
market is in equilibrium, what does the market believe will be the stock price at the end of 3 years?
(That is, what is P3?)

9. What will be the nominal rate of return on a preferred stock with a $100 par value, a stated
dividend of 8 percent of par, and a current market price of
(a) $60,
(b) $80,
(c) $100, and
(d) S140?