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E. $51.50
g = (D1 - D0)/D0 = ($1.03 - $1.00)/$1.00 = 0.03 (g = 3%)
Value of stock = D1/(r - g) = $1.03/(0.05 - 0.03) = $51.50
61. The Lory Company had net earnings of $127,000 this past
year. Dividends of $38,100 were paid. The company's equity
was $1,587,500. If Lory has 100,000 shares outstanding with a
current market price of $11.625 per share, and the growth rate
is 5.6%, what is the required rate of return?
A. 4.2%
B. 6%
C. 9%
D. 14%
E. None of these
R = Div/P0 + g = (.381(1.056))/11.625) + .056 = (.40/11.625) +
.056 = .0346 + .056 = .0906 = 9%
74. What are the components of the required rate of return on a
share of stock? Briefly explain each component.
The two components are dividend yield, which measures the
annual percentage income return on a stock, and the capital gains
yield, which is the percentage of price appreciation or
depreciation.
...
76. A number of publicly traded firms pay no dividends yet
investors are willing to buy shares in these firms. How is this
possible? Does this violate our basic principle of stock valuation?
Explain.
Our basic principle of stock valuation is that the value of a share
of stock is simply equal to the present value of all of the expected
dividends on the stock. According to the dividend growth model,
an asset that has no expected cash flows has a value of zero, so if
investors are willing to purchase shares of stock in firms that pay
no dividends, they evidently expect that the firms will begin
paying dividends at some point in the future.