Question

Snyder Computer Chips Inc. is experiencing a period of rapid growth. Earnings and dividends are expected to grow at a rate of 15% during the next two years, at 13% in the third year, and at a constant rate of 6% thereafter. Snyder's last dividend was $1.15, and the required rate of return on the stock is 12%.a. Calculate the value of the stock today.b. Calculate P1 and P2.c. Calculate the dividend yield and the expected capital gains yield for year 1.

Answer 1

Answer

Consider the following calculation

Explanation

D1 = 1.15*(1+0.15) = 1.3225

D2 = 1.3225*(1+0.15) = 1.52

D3 = 1.52*(1+0.13) = 1.719

D4 = 1.719*(1+0.06) = 1.82

According to dividend discount model,

P0 = D1/(R-G)

D1 - Dividend at t =1

R - Required rate

G - Growth rate

P3 = D4/(R-g) = 1.821/(0.12-0.06) = 30.36

Find P0 by discounting the future dividends and P3

P0 = 1.3225/(1+0.12) + 1.52/(1+0.12)^2 + 1.718/(1+0.12)^3 + 30.36/(1+0.12)^3 = $25.23

Current value of stock = $25.23

b.  P1 = 1.52/(1+0.12)^1 + 1.718/(1+0.12)^2 + 30.36/(1+0.12)^2 = $26.93

P2 = 1.718/(1+0.12)^1 + 30.36/(1+0.12)^1 = $28.64

c.  Dividend yield = Dividend/Price

For year 1, Dividend yield = 1.3225/25.23 = 0.0524 = 5.24%

Capital gains yield = (P1-P0)/P0 = (26.93-25.23)/25.23 = 0.0674 = 6.74%