Corporate Finance

Chapter-8

Presented by- Group 1

Group Presentation
Group (1) Members

MBF1 3 MBF1 30 MBF1 61 MBF116/3rd

Ko Aung Thu Ma Thandar Ko Hein Hein
Ko Kyaw Htoo Thar
Ta Aung

MBF1 4 MBF1 49 MBF1 69

MBF142/3rd
Ma Aye Aye Ma Nway Zar
Ma Saw Yu Ko Wai Moe
Myat Chi Min
Nandar

MBF1 7 MBF1 56 MBF1 72

Ma Su Myat Ma Wint Wah
Ma Aye Ma Ma Oo
Mon
Question 1
Stock Values [LO1] The RLX Co. just paid a dividend of $3.20 per share on its stock.
The dividends are expected to grow at a constant rate of 4 percent per year indefinitely.
If investors require a return of 10.5 percent on the company’s stock, what is the current
price? What will the price be in 3 years? In 15 years?
Answer:
D0 =$3.20, R= 10.5 percent, g = 4 percent, P0 =? P3 =? P15 =?
To calculate the current price of RLX Co. stock, we can use the Gordon growth model,
which relates the current stock price to the current dividend, the expected growth rate
of the dividends, and the required rate of return:
Pt = ( Dt x (1 + g))/R-g
P0 = ( D0 x (1 + g))/R-g
P0 = (3.20 x ( 1+ 0.04))/ (0.105 - 0.04) = $ 51.2
 
To calculate the price in 3 years, we need to first calculate the expected dividend per
share in 3 years. Using the constant growth rate formula:
Dt = D0 x ( 1 + g)t
Expected Dividend in 3 Years(D3) = $3.20 x (1 + 0.04) ^3 = $3.599
Next, we can use the same formula to calculate the expected stock price in 3 years:
Pt = ( Dt x (1 + g))/R-g
Expected Price in 3 Years (P3) = ($3.599 x (1 + 0.04) / (0.105 - 0.04) = $57.59
Therefore, the expected price of RLX Co. stock in 3 years is $57.59
To calculate the price in 15 years, we can follow the same process:
Dt = D0 x ( 1 + g)t
Expected Dividend in 15 Years = $3.20 x (1 + 0.04)^15 = $5.76
Expected Price in 15 Years = $5.76 x (1 + 0.04)/ (0.105 - 0.04) = $92.21
Question 2
Stock Values [LO1] The next dividend payment by Im, Inc., will be $1.87 per
share. The dividends are anticipated to maintain a growth rate of 4.3 percent
forever. If the stock currently sells for $37 per share, what is the required return?
Answer:
D1 = $1.87, g = 4.3 percent, P0 = $37, R = ?
We can use the Gordon Growth Model to solve for the required return of Im,
Inc.'s stock given the current stock price, the next dividend payment, and the
expected constant growth rate of dividends:
R = D1/P0 + g
Required Return = Dividend / Price + Dividend Growth Rate
Plugging in the values given in the problem, we get:
Required Return = $1.87 / $37 + 0.043 = 0.09354 or 9.35%
Therefore, the required return for Im, Inc.'s stock is 9.35%
Question 3
For the company in the previous problem, what is the dividend yield? What is the
expected capital gains yield?
Answer:
The dividend yield and capital gains yield can be calculated using the current stock
price, the next dividend payment, and the required return.
 
Dividend Yield = D1/P0
= Dividend / Stock Price
Plugging in the values given in the problem, we get:
Dividend Yield = $1.87 / $37 = 0.05 or 5%
Therefore, the dividend yield for Im, Inc.'s stock is 5%.
 
To calculate the expected capital gains yield, we can use the following formula:
 
Expected capital gains yield = Expected total return - Dividend yield
 where:
 Expected total return = Required return
 
Using the information from the previous problem:
 Required return = 9.35%
Dividend yield = 5.05%
 
Therefore, the expected capital gains yield is:
 Expected capital gains yield = 9.35% - 5.05% = 4.3%
 
So, the expected capital gains yield for this stock is 4.3%.
Question 4
Five Star Corporation will pay a dividend of $3.04 per share next year. The company
pledges to increase its dividend by 3.75 percent per year indefinitely. If you require a
return of 11 percent on your investment, how much will you pay for the company’s
stock today?
Answer:
Dividend next year (D1) = $3.04

Growth rate (g) = 3.75%

Required rate of return (Ke) = 11%

 
The formula for the present value of a stock using the dividend discount model
is:
PV =
where PV is the present value, D1 is the expected dividend for the next year,
Ke is the required return or cost of equity, and g is the expected growth rate of
the dividends.
In this case, D1 is $3.04, Ke is 11%, and g is 3.75%. Plugging in these values,
we get:
= $3.04 / (0.11 - 0.0375)
= $41.93
Stock price = $41.93
Question 5
Caccamise Co. is expected to maintain a constant 3.4 percent growth rate in its
dividends indefinitely. If the company has a dividend yield of 5.3 percent, what is
the required return on the company’s stock?
Answer:
We can use the Gordon Growth Model to solve this problem. The Gordon Growth Model is used
to calculate the required rate of return on a stock, given its current dividend, expected dividend
growth rate, and the current market price of the stock.

The formula for the Gordon Growth Model is:

Required rate of return = Dividend yield + Dividend growth rate

Where:
Dividend yield = Annual dividend / Current stock price
Dividend growth rate = Expected growth rate of dividends

We are given that the company has a constant growth rate of 3.4 percent in its dividends
indefinitely. This means that the expected growth rate of dividends is 3.4 percent.
We are also given that the company has a dividend yield of 5.3 percent.
Now, using the Gordon Growth Model formula, we can calculate the required rate of return on the
company's stock:

Required rate of return = Dividend yield + Dividend growth rate

Required rate of return = 5.3% + 3.4%
Required rate of return = 8.7%

Therefore, the required return on the company's stock is 8.7 percent.