$26.25 and theNote that this stock is called a "Hold" as its forecasted intrinsic value is equal to its current price Po=¹expected total return is equal to the required rate of return rs. If the market was more optimistic and the growth rate would be 6.00% rather than5.00%, the stock's forecasted intrinsic value would be Po$1.05= $35.00, which is greater than $26.25. In this case, you would call the0.0900-0.0600stock a "Buy".$1.050.0900-0.0500Suppose that the growth rate is expected to be 3.00%. In this case, the stock's forecasted intrinsic value would beprice, and the stock would be aits current Suppose that Do = $1.00 and the stock's last closing price is $26.25. It is expected that earnings and dividends will grow at a constant rate ofg = 5.00% per year and that the stock's price will grow at this same rate. Let us assume that the stock is fairly priced, that is, it is in equilibrium,and the most appropriate required rate of return is rs = 9.00%.The dividend received in period 1 is D₁ = $1.00 × (1+0.0500) = $1.05 and the estimated intrinsic value in the same period is based on theconstant growth model: P₁ = P²Using the same logic, compute the dividends, prices, and the present value of each of the dividends at the end of each period.Price(Dollars)$26.25PV of dividend at 9.00%(Dollars)DividendPeriod (Dollars)0$1.001.0512345The dividend yield for period 1 isThe capital gain yield expected during period 1 is4.00%O 5.00%and it will9.00%If it is forecasted that the total return equals 9.00% for the next 5 years, what is the forecasted total return out to infinity?O 14.00%and it willeach period.each period.

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$1.05 Note that this stock is called a "Hold" as its forecasted intrinsic value is equal to its current price Po=D₁₁ = $26.25 and the 0.0900-0.0500 expected total return is equal to the required rate of return s. If the market was more optimistic and the growth rate would be 6.00% rather than = $35.00, which is greater than $26.25. In this case, you would call the 5.00%, the stock's forecasted intrinsic value would be Po = $1.05 0.0900-0.0600 stock a "Buy". = Suppose that the growth rate is expected to be 3.00%. In this case, the stock's forecasted intrinsic value would be price, and the stock would be a its current

$1.05 Note that this stock is called a "Hold" as its forecasted intrinsic value is equal to its current price Po=D₁₁ = $26.25 and the 0.0900-0.0500 expected total return is equal to the required rate of return s. If the market was more optimistic and the growth rate would be 6.00% rather than = $35.00, which is greater than $26.25. In this case, you would call the 5.00%, the stock's forecasted intrinsic value would be Po = $1.05 0.0900-0.0600 stock a "Buy". = Suppose that the growth rate is expected to be 3.00%. In this case, the stock's forecasted intrinsic value would be price, and the stock would be a its current

Intermediate Financial Management (MindTap Course List)

13th Edition

ISBN:9781337395083

Author:Eugene F. Brigham, Phillip R. Daves

Publisher:Eugene F. Brigham, Phillip R. Daves

Chapter8: Basic Stock Valuation

Section: Chapter Questions

Problem 17MC: Now assume that the stock is currently selling at $30.29. What is its expected rate of return?

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