Expected rate of return

Page 425 of Essentials of investment

13.
a.Computer stocks currently provide an expected rate of return of 16% MBI a large computer company, will pay a year-end dividend of $2 per share. if the stock is selling at $50 per share, what must be the market’s expectation of the growth rate of MBI dividends?

Po = D1 / K-g | $50 = $2 / 0.16 – g
(016-g) x 50 = 2 || g= 0.16 -2/50 = 0.12 or 12%

b) If dividend growth for case for MBI are revised downwards to 5% per year, what will happen to the price of MBI stock @ what qualitatively will happen to the company price-earnings ratio?
14. Even better products have come out with a new and improved product. as a result, the firm projects an ROE of 20%, and it will maintain a plowback ratio of .30. its earnings this year will be $2 per share. investors expect a 12% rate of return on the stock.

a) At what price and P/E ratio would you expect the firm to sell

Plowback ratio = Rentention ratio or 1 – Divident rayout ratio
G= ROE x b where b: plowback ratio
G= 0.2 x 0.3 = 0.06 or 6%

Po = D1 / K-g K is cost of equity or expected return
E1= $2
D1 = 0.70 x $2 = $1.40

Formula >> P0 = D1/K-g = D0(1+g)/K-g

P0 = 140/0.12-0.06 = $23.33

Po / E1 = 23.33/2 = 11.67

C. What would be the P/E ratio and the present value of growth opportunities if the first planned reinvest only 20% of its earnings?

P0 = 160/0.12-0.04 = $20

Po / E1 = 20/2 = 10

Page 431 CFA Exam

Q9 – Helen morgan, CFA. has been asked to use the DDM to determine the value of sun. morgan anticipated that sundanci’s earnings and dividends will grow at 32% for two years an 13% thereafter.

Calculate current value of a share of sundanci stock by using two stage dividend discount model and the data below

Formula Pt = Dt + 1 / K-g

T=1 D1 = D0 x (1+g1) = 0.286x (1.32) = 0.377
T2 = D2 = D1 x (1+g1) = o.377x(1.32)=0.497
P2= 0.497*(0.13 +1) / 0.14-0.13 = 56.31

R&D Expense as %
of Net Turnover
Personnel
Expenses
Average Number
Of Employees
Profit After Tax Net Turnover Personnel Expenses dvidided by Number of Employees Profits per Employee
0 £28,899,000 1,674 £7,583,000 £136,040,000 28,900,674 £4,529.87
0 £1,365,000 127 -£266,000 £3,350,000 1,365,127 -£2,094.49 NE vs NT 0.989833012
0 £2,641,000 211 £65,000 £13,645,000 2,641,211 £308.06 #emp vs Prof 0.107753812
0 £6,238,000 371 -£1,089,000 £15,345,000 6,238,371 -£2,935.31 P ex vs # emp 0.998357696
0 £8,536,000 666 -£1,261,000 £27,775,000 8,536,666 -£1,893.39 prof vs # emp 0.799340109
0 £20,077,000 790 £97,000 £71,988,000 20,077,790 £122.78
0 £57,979,000 2,781 £11,604,000 £138,511,000 57,981,781 £4,172.60
0 £10,160,000 549 £2,284,000 £31,531,000 10,160,549 £4,160.29
0 £44,034,000 2,117 -£5,890,000 £180,356,000 44,036,117 -£2,782.24
0 £46,635,000 2,351 £2,958,000 £221,137,000 46,637,351 £1,258.19
0 £8,751,000 575 -£914,000 £24,764,000 8,751,575 -£1,589.57
0 £5,185,000 276 £901,000 £16,848,000 5,185,276 £3,264.49
0 £44,518,000 2,309 £16,714,000 £253,347,000 44,520,309 £7,238.63
0 £1,189,000 69 £83,000 £4,298,000 1,189,069 £1,202.90
0 £17,375,000 1,087 £287,000 £60,424,000 17,376,087 £264.03
0 £22,596,000 1,699 £9,874,000 £95,796,000 22,597,699 £5,811.65
0 £30,100,000 1,338 £4,200,000 £110,600,000 30,101,338 £3,139.01
0 £30,100,000 1,338 £4,200,000 £110,600,000 30,101,338 £3,139.01
0 £8,716,000 488 £843,000 £28,438,000 8,716,488 £1,727.46
0 £5,791,000 243 £3,411,000 £22,878,000 5,791,243 £14,037.04
0 £139,200,000 6,649 -£30,900,000 £496,800,000 139,206,649 -£4,647.32
0 £24,214,000 1,462 £1,976,000 £79,245,000 24,215,462 £1,351.57
0 £6,683,000 361 £402,000 £18,933,000 6,683,361 £1,113.57
0 £14,839,000 678 -£5,927,000 £83,478,000 14,839,678 -£8,741.89
0.06 £13,482,000 729 £2,293,000 £61,940,000 13,482,729 £3,145.40
0.52 £138,117,000 6,551 £21,513,000 £470,688,000 138,123,551 £3,283.93
0.54 £6,461,000 458 £1,542,000 £26,316,000 6,461,458 £3,366.81
0.72 £24,843,000 895 -£2,868,000 £78,585,000 24,843,895 -£3,204.47
0.78 £214,050,000 9,515 £41,550,000 £745,936,000 214,059,515 £4,366.79
0.81 £216,400,000 10,805 £26,300,000 £934,000,000 216,410,805 £2,434.06
0.91 £8,636,000 573 -£235,000 £30,877,000 8,636,573 -£410.12
0.93 £59,186,000 2,773 £35,870,000 £203,917,000 59,188,773 £12,935.45
1.14 £21,799,000 949 £3,152,000 £130,217,000 21,799,949 £3,321.39
1.15 £255,500,000 11,414 £69,600,000 £1,180,100,000 255,511,414 £6,097.77
1.27 £18,677,000 1,046 £5,551,000 £98,683,000 18,678,046 £5,306.88
1.28 £389,400,000 18,303 £79,800,000 £1,501,800,000 389,418,303 £4,359.94
1.63 £5,185,000 267 £1,388,000 £27,549,000 5,185,267 £5,198.50
2.95 £6,505,000 289 £3,765,000 £25,835,000 6,505,289 £13,027.68

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