1 / 6

Future Stock Valuation Analysis for Better Mousetraps

Analyzing targets like DIV1 through DIV4, future stock price, P0, dividend yield, and rate of return for Better Mousetraps company. Understand the significance of discount rate in stock valuation.

yvonneberry
Download Presentation

Future Stock Valuation Analysis for Better Mousetraps

An Image/Link below is provided (as is) to download presentation Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author. Content is provided to you AS IS for your information and personal use only. Download presentation by click this link. While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server. During download, if you can't get a presentation, the file might be deleted by the publisher.

E N D

Presentation Transcript

  1. Examples Example A: … • Question: Suppose Blue Skies stock is selling for $75 a share (P0 = $75). Investors expect a $3 cash dividend over the next year (DIV1 = $3). They also expect the stock to sell for $81 a year hence (P1 = $81). Then the expected return to stockholders is …

  2. Examples Example A: … • Question: Suppose Blue Skies stock is selling for $75 a share (P0 = $75). Investors expect a $3 cash dividend over the next year (DIV1 = $3). They also expect the stock to sell for $81 a year hence (P1 = $81). • Answer: 12 percent

  3. Examples Example B: … • Question: Assume a dividend has just been paid. The next dividend, to be paid in a year, is forecast at DIV1 = $3, the growth rate of dividends is g = 8% , and the discount rate is r = 12%. The stock value is… • Answer:

  4. Examples Example B: … • Question: Assume a dividend has just been paid. The next dividend, to be paid in a year, is forecast at DIV1 = $3, the growth rate of dividends is g = 8% , and the discount rate is r = 12%. The stock value is… • Answer: $ 75

  5. Examples Example C: … • Question: Better Mousetraps has come out with an improved product, and the world is beating a path to its door. As a result, the firm projects growth of 20 percent per year for 4 years. By then, other firms will have copycat technology, competition will drive down profit margins, and the sustainable growth rate will fall to 5 percent. The most recent annual dividend was DIV0 = $1.00 per share. • a. What are the expected values of DIV1, DIV2, DIV3, and DIV4?; b. What is the expected stock price 4 years from now? The discount rate is 10 percent; c. What is the stock price today?; d. Find the dividend yield, DIV1/P0.; e. What will next year’s stock price, P1, be?; f. What is the expected rate of return to an investor who buys the stock now and sells it in 1 year? 1

  6. Examples Example D: … • Question: • Gentleman Gym just paid its annual dividend of $2 per share, and it is widely expected that the dividend will increase by 5 percent per year indefinitely. • a. What price should the stock sell at? The discount rate is 15 percent. • b. How would your answer change if the discount rate were only 12 percent? Why does the answer change?

More Related