Posted: September 13th, 2017
Paper, Order, or Assignment Requirements
Project Overview
Calculate a stock price using its past dividends as an indicator of future dividend growth rate. You will determine the stock’s required rate of return (CAPM) and future expected dividend growth rate. You will use the Dividend Growth Model to calculate a current theoretical value of the stock price for Asset J.
Deliverable
Complete problems 1 through 8 and answer questions in an essay format when required. You will need to use the answers in question 1 and 2 to answer question 3.
where,
kj = required return on asset j,
Rf = risk-free rate of return, (6%)
bj = beta coefficient for asset j, (1.75)
Rm = market return. (10%)
The equation for CAPM is kj = Rf + [bj x (Rm – Rf)]
kj = Solve for required return on asset j (kj is CAPM)
Year | 1 | 2 | 3 | 4 | 5 | 6 | 7 | 8 |
Dividend | $0.86 | $2.00 |
Let:
Dj = $ .86,
D8 = $2.00,
n = 8.
The equation for calculating the growth rate of dividends is the future value equation. FV=PV(1+i)n
where:
Dj = PV,
D8 = FV,
n = time
Growth Rate = I
Calculate the growth rate: Remember you have to change the Future Value Equation to find N or use your calculator.
V = (Current Dividend * (1 + Dividend Growth))
(Required Return – Dividend Growth)
where:
V = price of the common stock,
Current Dividend = Most recently paid dividend,
Required return on common stock = CAPM
Dividend Growth = Growth Rate of Dividend
Year | 1 | 2 | 3 | 4 | 5 |
Dividend | $1.42 | $2.00 |
Let:
D1= $1.42,
D8= $2.00,
n = 5.
The equation for calculating the growth rate of dividends is the future value equation. FV=PV(1+i)n
where:
Dj = PV,
D8 = FV,
n = time
Growth Rate = I
V = (Current Dividend * (1 + Dividend Growth))
(Required Return – Dividend Growth)
You need to plug in the dividend growth rates from appropriate results above.
V = (Current Dividend * (1 + Dividend Growth))
(Required Return – Dividend Growth)
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