 # Stock valuation Q

A stock has a steady 5% growth in dividends. The required rate of return for the stock of this risk class is 15%. The stock is expected to pay a \$1 dividend this coming year. The expected value of the stock at the end of the fourth yr is a \$10 b 12.16 c 14.21 d 16.32

A …from eyeballing it. oh…at the end of the 4th year… I am wrong… B is right.

B

B. (1.05^4/(.15 - .1)

how did you get B?

P0= D1/(k-g) =1/(1.15-1.05) = 10 4 years from now 10 * (1.05)^4

Strange… if you buy the stock at \$10, receive the 4 dividend payments and then sell it for \$12.16, the return you get annualised is less than the required rate of return for this stock… it’s around 13%

Is the answer B or D ? I am getting close to 16.3

B

yickwong Wrote: ------------------------------------------------------- > Strange… if you buy the stock at \$10, receive > the 4 dividend payments and then sell it for > \$12.16, the return you get annualised is less than > the required rate of return for this stock… it’s > around 13% No it’s not. CF0=-10 CF1=1 CF2=1.05 CF3=1.1025 CF4=12.16+1.05^3 CPT IRR = 15%

oh crap. I would’ve missed this on the test cuz I would’ve thought stock value this year… sucks I lose a lot of points from carelessness…

chrismaths Wrote: ------------------------------------------------------- > yickwong Wrote: > -------------------------------------------------- > ----- > > Strange… if you buy the stock at \$10, > receive > > the 4 dividend payments and then sell it for > > \$12.16, the return you get annualised is less > than > > the required rate of return for this stock… > it’s > > around 13% > > > No it’s not. > > CF0=-10 > CF1=1 > CF2=1.05 > CF3=1.1025 > CF4=12.16+1.05^3 > > CPT IRR = 15% thanks, must 've done some calculations wrong then.