Question

You are analyzing the Victoria Inc. (VI) stock. Assume that VI’s required rate of return is 15 percent. Assume that VI is a constant growth company whose last dividend D0, was $3.0, and whose dividend is expected to grow indefinitely at a 6 percent rate forever. A. What is the firm’s expected dividend in 3 years? B. What is the firm’s current stock price? C. What is the stock's expected value 1 year from now? D. What is the expected dividend yield, the capital gains yield, and the total return during the first year? E. What would the stock price be if its dividends were expected to have zero growth?

Answer 1

A. The expected dividend in 3 years is $3.573.

B. The current stock price is $33.33.

C. The expected stock value in 1 year is $34.88.

D. The expected dividend yield, capital gains yield, and total return in the first year are 9.54%, 6%, and 15.54%, respectively.

E. The stock price if its dividends were expected to have zero growth is $20.00.

Step-by-step explanation:

Victoria Inc. (VI) Stock Analysis

Assumptions:

• Required rate of return (r) = 15%
• Last dividend (D0) = $3.00
• Dividend growth rate (g) = 6%

A. Expected Dividend in 3 Years:

We can use the constant growth dividend discount model (DDM) to calculate the expected dividend in 3 years:

Expected Dividend in Year 3 (D3) = D0 * (1 + g)^3

D3 = $3.00 * (1 + 0.06)^3

D3 = $3.573

B. Current Stock Price:

Current Stock Price (P0) = D0 / (r - g)

P0 = $3.00 / (0.15 - 0.06)

P0 = $33.33

C. Expected Stock Value in 1 Year:

Expected Stock Value in 1 Year (P1) = D1 / (r - g)

D1 = D0 * (1 + g) = $3.00 * (1 + 0.06) = $3.18

P1 = $3.18 / (0.15 - 0.06)

P1 = $34.88

D. Expected Dividend Yield, Capital Gains Yield, and Total Return in the First Year:

Dividend Yield (Y1): D1 / P0 = $3.18 / $33.33 = 9.54%

Capital Gains Yield (g): 6%

Total Return (Y1 + g): 15.54%

E. Stock Price with Zero Growth:

Zero Growth Stock Price (P0_zero) = D0 / r

P0_zero = $3.00 / 0.15

P0_zero = $20.00