19. Dividend Yield. Find the quote for the Laclede Group. Assume that the dividend is constant. What was the highest dividend yield over the past year? What was the lowest dividend yield over the past year?
20. Stock Valuation. According to the Value Line investment Survey, the growth rate in dividends for IBM for the next five years is expected to he ll) percent. Suppose IBM meets this growth rale in dividends for the next live years and then the dividend growth rate falls to 5 percent indefinitely. Assume investors require an 11 percent return on IBM stock. Is the stock priced correctly? What factors could affect your answer?
21. Stock Valuation. According to the Value Line Investment Survey, the growth rale in dividends for Duke Energy for the previous 1(1 years has been 1.5 percent. If investors feel ihis growth rate will continue, what is the required return for Duke Energy stock?
22. Negative Growth. According to the Value Line Investment Survey, the growth rate in dividends for JCPehney for the previous 10 years has been -10 percent. If investors feel this growth rate will continue, what is the required return for JCPenney stock? Does this number make sense? What are some of the potential reasons for the negative growth in dividends?
23. Stock Quotes. Using the dividend yield, calculate the closing price for Tootsie Roll on this day. The actual closing price for Tootsie Roll was S32.4.1 Why is your closing price different? The Value Line Investment Survey projects a 7 percent dividend growth rate for Tootsie Roll. W hat is the required return for the stock using the dividend discount model and the actual stock price?
24. Capital Gains versus Income. Consider four different stocks, all of which CHALLENGE have a required return of 16 percent and a most recent dividend of S2.80 per share. (Questions 24-25) Stocks W, X, and Y arc expected to maintain constant growth rates in dividends for the foreseeable future of 10 percent, 0 percent, and -5 percent per year, respectively. Stock Z is a growth slock that will increase its dividend by 20 percent for the next two years and then maintain a constant 12 percent growth rate, thereafter. What is the dividend yield for each of these four stocks? What is the expected capital gains yield? Discuss the relationship among the various returns that you find for each of these stocks.
25. Stock Valuation. Most corporations pay quarterly dividends on their common stock rather than annual dividends. Barring any unusual circumstances during the year, the board raises, lowers, or maintains the current dividend once a year and then pays this dividend out in equal quarterly installments to its shareholders.
a. Suppose a company currently pays a S2.40 annual dividend on ils common stock in a single annual installment, and management plans on raising this dividend by
6 percent per year indefinitely. If the required return on this stock is [2 percent, what is the current share price? b. Now suppose the company in (a) actually pays its annual dividend in equal quarterly installments: thus the company has just paid a $.60 dividend per share, as it has for the previous three quarters. What is your value for ihe current share price now? (Hint: Find the equivalent annual end of-ycar dividend lor each year.) Comment on whether you think this model of stock valuation is appropriate.
WHAT'S ON THE WEB?
7.1 Dividend Discount Model. According to the December 2006 Value Line Investment Survey, the dividend growth rate for ExxonMobil (XOM) is 7 percent. Find the current stock price quote and dividend information at finance.yahoo. com. If this dividend growth rate is correct, what is the required return for ExxonMobil? Does ihis numher make sense to you?
7.2 Dividend Discount Model. Go to www.dividenddiscountmodel.com and enter MRK (for Merck) as the ticker symbol. You can enter a required return in the Discount Rate box and the site will calculate the stock price using the dividend discount model. If you want an 11 percent return, what price should you be willing to pay for the stock? At what required return does the current stock price make sense? You will need to enter different required returns until you arrive at the current stock price. Does this required return make sense? Using this market required return for Merck, how does the price change if the required return increases by 1 percent? What does this tell you about the sensitivity of the dividend discount model to the inputs of the equation?
7.3 Stock Quotes. What is the most expensive publicly traded stock in the United States? Go to finance.yahoo.com and enter BRKA (for Berkshire Hathaway Class A) and select "Detailed" on the pull-down menu. What is the current price per share? What is the 52-week high and low? How many shares trade on an average day? How many shares have traded today?
7.4 Supernormal Growth. You are interested in buying stock in Coca-Cola (KO). You believe that the dividends will grow at 15 percent for the next four years and level off at 6 percent thereafter. Using the most recent dividend on finance.yahoo. com. if you want a 12 percent return, how much should you be willing lo pay for a share of stock?
7.5 Market Operations. How docs a stock trade take place? Go lo www.nyse.com, click on "The Trading Floor" and "Anatomy of a Trade." Describe the process of a trade on the NYSE.
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