COMR 473 - Group Assignment 5 PDF

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COMR 473 - 2020W2 – Assignment 5

COMR 473 - 2020W2 Group Assignment 5 Valuation of Stocks Part 2 30 minutes Name: Group: Problem 1 TechNix Co. just paid a $2.50 dividend. Dividends are expected to grow at the constant rate of 10% per year and the required return for stocks with similar risk to TechNix Co. is 20%. (Round your final answers to the nearest cent. You can round intermediate steps to four decimals.) a) Calculate the current stock price for TechNix Co. Current stock price= 27.5 b) How much does the expected future growth in the dividend contribute to the calculated stock price when compared to a dividend that is not expected to grow? Thus there is difference of 12.5 dollars The expected future growth in the dividend will lead to increase in price of the stock P= D(r-g) g =0 P = D/R P = 2.5/0.2 27.5 - 2.5 = $15

c)

After consulting with management, you determine that the expected growth rate of 10% is only expected to last for two years. After that, the dividend is expected to grow at the long term industry growth rate of 5%. If your required rate of return remains 20%, calculate the current stock price.

Dividend1=2.75 Dividend 3= (2.5 * (1+.1)^2 * (1+.05) = $3.18 P2 = D3/(r-g)= 3.1763/(20%-5%) = 21.1753 P0 = (21.1753+3.025) * (1+20%)^(-2) + (2.75) * (1+20%)^(-1) = 19.0975

1 COMR 473

Jose Pizarro

Dividend2=3.025

COMR 473 - 2020W2 – Assignment 5

d) The information provided to you by the management is considered private today and will be publicly announced tomorrow. If the market is strong efficient, what is the price of the stock today and tomorrow? How will your answer change if the market is semistrong efficient? No changes in stock price Price remains constant. If semi-strong, price will decrease tomo.

2 COMR 473

Jose Pizarro...