DCF?

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vc

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A stock is not expected to pay dividends until yhree years from now.The dividend is then expected to be $2 per share,the dividend payout ratio is expected to be 40 percent,and the return on equity is expected to be 15%.if the required rate of return is 12%,the value of the stock today is closest to :

A $27

B$33

C$53

D$67

can i calculate by DCF?

(1.12 discount 3 y * $2 ) + ( 1.12 discount 3 y * 33.333333)


*33.3333 come from

($2/0.4)=EPS = $5

$5/0.15 = Earning = 33.33333
 
Modification

A stock is not expected to pay dividends until yhree years from now.The dividend is then expected to be $2 per share,the dividend payout ratio is expected to be 40 percent,and the return on equity is expected to be 15%.if the required rate of return is 12%,the value of the stock today is closest to :

A $27

B$33

C$53

D$67

can i calculate by DCF?

(1.12 discount 3 y * $2 ) + ( 1.12 discount 3 y * 33.333333)


*33.3333 come from

($2/0.4)=EPS = $5

$5/0.15 = stock price = 33.33333
 
Hi VC,

My answer of the question is as follows:

Price of the stock at the start of the 2 year = Dividend / (k - g)

We have Dividend = 2 and k - 12%

g = (1-Retention Rate)(ROE)=(1-0.40)(15%) = 9%

Therefore Price of the stock at the start of the 2 year = 2/ (0.12-.09) = 66.667

Therefore Price today is 66.667/(1.12)^2 = 53.14

Therefore the answer is 53.

Please let me know whether my answer is right. I am not completely sure. And post more such questions if you have at [email protected]

Thanks.
Salil
 
Salil,

I got the same answer of $53.15. So what is the correct answer. I believe we are correct, but i dont know unless i know the answer...
 
yes , you all right , but i don't know ,why you guys calculate by this method .Of course

i know it is work . but did you guys consider to use DCF ? If i sitting on the exam , how

can i make sure , i use the right method . I miss something or i got the wrong picture

anyone like to tell me ?


Thanks
 
vc Wrote:
-------------------------------------------------------
> yes , you all right , but i don't know ,why you
> guys calculate by this method .Of course
>
> i know it is work . but did you guys consider to
> use DCF ? If i sitting on the exam , how
>
> can i make sure , i use the right method . I miss
> something or i got the wrong picture
>
> anyone like to tell me ?
>
>
> Thanks


It is a simple application of DCF. More precisely, dividend growth model (to calculate the stock price at the end of year three) and time value of money (to discount the stock price at the end of year 3 to today). What exactly are you having difficulty with?
 
In this case , don't any word say " constant" so why D/ K-G ? .

i suppose DCF to be better ?

like my calculate ? of course the ans is calculate by D/K-G
 
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