Dividend discount model is the starting point of the stock valuation framework. This question pertains to common equity valuation using this model. The following table contains information about the estimated next year's EPS, payout ratio, shareholders' required rate of return, and return on equity of four different companies: Company A Company B Company C Company D EPS $0.75 $1.00 $1.25 $1.50 Payout Ratio 30% 50% 60% 40% Required rate of Return ROE 13% 11% 12% 14% 16.00% 15.00% 14.00% 16.00% ⚫ a) Calculate each company's future earnings growth rate. Using the earnings model, what is the value of the stock? ⚫ b) Using the constant-growth dividend discount model, what is the value of the stock? c) Assume that the companies will experience the growth rate determined in part (a) for a short period of time, and after that the firms will grow at a lower rate. These periods of time and second growth rates are presented in the table below. Using the two-stage dividend growth model, what is the value of the stock? Growth Rate #2 Growth Rate #1 Time Company A 5.00% 2.00 years Company B 4.00% 3.00 years Company C 3.00% 4.00 years Company D 4.00% 3.00 years d) Create a Scatter chart to show the relationship between the value of the stock and the dividend payout ratio using Company D. Can you observe any price that is extremely different from the rest? Interpret your results. (Hint: Similar with one of our in-class example. Datatable may help)
Dividend discount model is the starting point of the stock valuation framework. This question pertains to common equity valuation using this model. The following table contains information about the estimated next year's EPS, payout ratio, shareholders' required rate of return, and return on equity of four different companies: Company A Company B Company C Company D EPS $0.75 $1.00 $1.25 $1.50 Payout Ratio 30% 50% 60% 40% Required rate of Return ROE 13% 11% 12% 14% 16.00% 15.00% 14.00% 16.00% ⚫ a) Calculate each company's future earnings growth rate. Using the earnings model, what is the value of the stock? ⚫ b) Using the constant-growth dividend discount model, what is the value of the stock? c) Assume that the companies will experience the growth rate determined in part (a) for a short period of time, and after that the firms will grow at a lower rate. These periods of time and second growth rates are presented in the table below. Using the two-stage dividend growth model, what is the value of the stock? Growth Rate #2 Growth Rate #1 Time Company A 5.00% 2.00 years Company B 4.00% 3.00 years Company C 3.00% 4.00 years Company D 4.00% 3.00 years d) Create a Scatter chart to show the relationship between the value of the stock and the dividend payout ratio using Company D. Can you observe any price that is extremely different from the rest? Interpret your results. (Hint: Similar with one of our in-class example. Datatable may help)
Managerial Accounting: The Cornerstone of Business Decision-Making
7th Edition
ISBN:9781337115773
Author:Maryanne M. Mowen, Don R. Hansen, Dan L. Heitger
Publisher:Maryanne M. Mowen, Don R. Hansen, Dan L. Heitger
Chapter15: Financial Statement Analysis
Section: Chapter Questions
Problem 66P
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Transcribed Image Text:Dividend discount model is the starting point of the stock valuation framework. This question
pertains to common equity valuation using this model.
The following table contains information about the estimated next year's EPS, payout
ratio, shareholders' required rate of return, and return on equity of four different companies:
Company A Company B Company C Company D
EPS
$0.75
$1.00
$1.25
$1.50
Payout Ratio
30%
50%
60%
40%
Required rate of Return
ROE
13%
11%
12%
14%
16.00%
15.00%
14.00%
16.00%
⚫ a) Calculate each company's future earnings growth rate. Using the earnings model,
what is the value of the stock?
⚫ b) Using the constant-growth dividend discount model, what is the value of the stock?
c) Assume that the companies will experience the growth rate determined in part (a)
for a short period of time, and after that the firms will grow at a lower rate. These
periods of time and second growth rates are presented in the table below. Using the
two-stage dividend growth model, what is the value of the stock?
Growth Rate #2
Growth Rate #1 Time
Company A
5.00%
2.00 years
Company B
4.00%
3.00 years
Company C
3.00%
4.00 years
Company D
4.00%
3.00 years
d) Create a Scatter chart to show the relationship between the value of the stock
and the dividend payout ratio using Company D. Can you observe any price that is
extremely different from the rest? Interpret your results. (Hint: Similar with one of
our in-class example. Datatable may help)
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