1st assignment is:
Hamilton Landscaping’s dividend growth rate is expected to be 30% in the next year, drop to 15% from Year 1 to Year 2, and drop to a constant 5% for Year 2 and all subsequent years. Hamilton has just paid a dividend of $2.50 and its stock has a required return of 11%.
a. What is Hamilton’s estimated stock price today?
D0
$2.50
rs
11.0%
g0,1
30%
Short-run g; for Year 1 only.
g1,2
15%
Short-run g; for Year 2 only.
gL
5%
Long-run g; for Year 3 and all following years.
g
30%
15%
5%
5%
Year
0
1
2
3
Dividend
PV of dividends and PV of horizon value
= D2 (1+g) = D3
= Horizon value = P2 =
= rs – gL
= P0
a. What is Hamilton’s estimated stock price for Year 1?
P1
=
P2
+
D2
(1 + rs)
P1
=
+
P1
=
b. If you bought the stock at Year 0, what your expected dividend yield and capital gains for the upcoming year?
1. Find the expected dividend yield.
Dividend yield =
D1
/
P0
Dividend yield =
/
Dividend yield =
2. Find the expected capital gains yield.
Use the estimated price for Year 1, P1, to find the expected gain.
Cap. Gain yield=
(P1 – P0)
/
P0
Cap. Gain yield=
/
Cap. Gain yield=
Alternatively, the capital gains yield can be calculated by simply subtracting the dividend yield from the total expected return.
Cap. Gain yield=
Expected return
–
Dividend yield
Cap. Gain yield=
–
Cap. Gain yield=
c. What your expected dividend yield and capital gains for the second year (from Year 1 to Year 2)? Why aren’t these the same as for the first year?
1. Find the expected dividend yield.
Dividend yield =
D2
/
P1
Dividend yield =
/
Dividend yield =
2. Find the expected capital gains yield.
Use the estimated price for Year 2, P2, to find the expected gain.
Cap. Gain yield=
(P2 – P1)
/
P1
Cap. Gain yield=
/
Cap. Gain yield=
Alternatively, the capital gains yield can be calculated by simply subtracting the dividend yield from the total expected return.
Cap. Gain yield=
Expected return
–
Dividend yield
Cap. Gain yield=
–
Cap. Gain yield=
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