Financial ManagementFinancial ManagementDiscussion 6Discussion 6

• Dt dividend the stockholder expects to receive at the end of Year t.• D0 is the most recent dividend, which has

already been paid• D1 is the first dividend expected, and it will

be paid at the end of this year.– D2 is the dividend expected at the end of

two years; and so forth.• P0 actual market price of the stock today

• expected price of the stock at the end of each Year t. – is the intrinsic, or fundamental,

value of the stock today as seen by the particular investor doing the analysis.

– is the price expected at the end of one year ; and so on.

tP̂

0̂P

1P̂

• g expected growth rate in dividends as predicted by a marginal investor.

• rs minimum acceptable, or required, rate of return on the stock, considering both its riskiness and the returns available on other investments.

• rs expected rate of return that an investor who buys the stock expects to receive in the future

• rs actual, or realized, after-the-fact rate of return

Equations

ssss r

D

r

D

r

D

r

DP

1. . .

111ˆ

33

22

11

0

gr

D

gr

gDP

ss

100

1ˆ

Expected Dividends

constant growth stock

SML ( Security Market Line)

rs = rRF + (RPM)bFirm

Equationsexpected dividend yield & Capital Gain Yield

.r toˆ0

1s

10 g

P

D

gr

DP

s

Equations

Problem 8-1 page 307

D1 = D0(1 + g1) = $1.50(1.05) = $1.5750.

D2 = D0(1 + g1)(1 + g2) = $1.50(1.05)2 = $1.6538.

D3 = D0(1 + g1)(1 + g2)(1 + g3) = $1.50(1.05)3 = $1.7364.

D4 = D0(1 + g1)(1 + g2)(1 + g3)(1 + gn) = $1.50(1.05)3(1.10)

= $1.9101.D5 = D0(1 + g1)(1 + g2)(1 + g3)(1 + gn)

2 =

$1.50(1.05)3(1.10)2 = $2.1011.

Problem 8-2 page 307

=

=

1.50 / 0.15 – 0.07 =6.25 $

Problem 8-3 page 308

Problem 8-6 page 308

Problem 8-4 page 306

rps =

ps

ps

v

D= 5 / 50 X 100% = 10%