《Chapter 8 - Stock Valuation》.ppt

A stock sells for $10 per share. It is expected to pay a $1 dividend in one year. Dividends, and thus the price of the stock, are expected to grow at a 5% annual rate. 8.4a. What is the price of the stock expected to be in  one year? P1 = P0 x (1 + g) = $10 x (1 + .05) = $10.50 CN55 A stock sells for $10 per share. It is expected to pay a $1 dividend in one year. Dividends, and thus the price of the stock, are expected to grow at a 5% annual rate. 8.4b. What is the dividend yield? Dividend yield = D1 = $1 = 10% P0 $10 8.4c. What is the total required return on the stock? Total required return = Dividend yield + Capital gains yield = .10 + .05 = .15 = 15% CN55 You purchased a stock today for $25. In one year it pays a $1.25 dividend and sells for $30. What are the dividend yield, capital gains yield, and total return? 8.5a. What is the dividend yield? $1.25 = .05 = 5% $25  CN55 You purchased a stock today for $25. In one year it pays a $1.25 dividend and sells for $30. What are the dividend yield, capital gains yield, and total return? 8.5b. What is the capital gains yield? Capital gains yield = % change in price = P1 – P0 = $30 – $25 = .2 = 20% P0 $25 8.5c. What is the total return? 5% + 20% = 25% CN55 8-*; 8-*; 8-*; Financial markets are institutions and procedures that facilitate transactions in all types of financial claims. This accomplishes the primary function of a financial market: Transfer savings from net savers (households with savings) to net demanders of savings (businesses who need savings) Real (physical) assets – tangible assets Financial assets – claims for future payments (to be produced by real assets) CN49 Primary