The company expects dividends to growth at 20% per year for the next 12 years and eventually leveling off at 9% into perpetuity.
DJI just paid a dividend of $1.95. If the required return on the stock is 12%, what is the current share price of the stock
1 answer:
Answer:
Price of the stock today = $199.83
Explanation:
The current price of the stock can be computed using the two stage dividend growth model of the DDM approach. The DDM or dividend discount model values a stock based on the present value of the expected future dividends from the stock.
The formula for the price of the stock today using the two stage growth model is attached.
Price of the stock today = 1.95 * (1+0.2) / (1+0.12) + 1.95 * (1+0.2)^2 / (1+0.12)^2
+ 1.95 * (1+0.2)^3 / (1+0.12)^3 + ... + 1.95 * (1+0.2)^12 / (1+0.12)^12 +
[ (1.95 * (1+0.2)^12 * (1+0.09)) / (0.12 - 0.09) ] / (1+0.12)^12
Price of the stock today = $199.83
You might be interested in
Answer: The one day rate of return on the stock is 1.49%
We arrive at the answer in the following manner:
First we need to calculate yesterday's and today's index values.
For that we need to find weights of each day based on market capitalization.
The weight of a company in the index is calculated by dividing the market capitalization of a company by the total market capitalization of all the companies whose shares are a part of the index.
Then, we multiply the share price of each company with their respective weights and find the total to arrive at the index value for one day.
<u>Yesterday's Index Value</u>
Stock Price No. of shares Mkt Cap Weight Weight*Price
A 12 600000 7200000 0.25 2.96 (0.25*12)
B 20 500000 10000000 0.34 6.85(0.34*20)
C 60 200000 <u>12000000</u> <u>0.41</u> <u>24.66 </u>(0.41*60)
Total 29200000 1.00 34.47
We calculate the weight for stock A as follows:
We calculate the weights of the remaining stocks in a similar manner.
Please note that the sum total of all weights must add up to 1.
The sum total of the last column (Price * Weight) is yesterday's index value.
We repeat the same steps with today's market price to arrive at today's index value.
<u>Today's index Value</u>
Stock Price No. of shares Mkt Cap Weight Weight*Price
A 16 600000 96,00,000 0.31 4.95 (0.31*16)
B 18 500000 90,00,000 0.29 5.23 (0.29*18)
C 62 200000 <u>1,24,00,000</u> <u>0.40</u> <u>24.80</u>(0.40*62)
Total 3,10,00,000 1.00 34.98
<u>One-day Rate of Return</u>
We can calculate the one day rate of return on the index as follows:
Rate of return = 0.01494 or 1.49%