XYZ Corporation is expected to pay a $2.00 per share cash dividend to owners of their common stock one year from today. The dividends are paid annually, and are expected to remain at this $2.00 per share level forever. The appropriate discount rate, given the risk of the stock, is E[r] = 10%EAR.

Determine the fair value (also known as the "intrinsic value") of the stock.

If you purchased the stock for the fair price (computed in Part A) and held the stock forever, what annualized rate of return would you earn?

If you purchased the stock for $10 per share today, and held the stock forever, what annualized rate of return would you earn?

If you bought the stock for $10 per share today, and sold it for fair value in 4 years (just after the 4^th dividend is paid), what annualized rate of return would you earn?

Now assume that the growth rate of the cash dividends for XYZ Corporation is expected to be 7% per year, forever. The dividend next year is still expected to be $2.00 per share. Using a discount rate of E[r] = 10%^EAR, what is the intrinsic value, today, of the stock?

If you bought the stock in Part E (with g = 7%), and held the stock forever, what annualized rate of return would you earn?

If you bought the stock in Part E for $200 per share today, and held it forever, what annualized rate of return would you earn?

If you bought the stock in Part E for $200 per share today, and sold it for fair value in 8 years (just after the dividend is paid, 8 years from today) what annualized rate of return would you earn?

Answer rating: 100% (QA)

To determine the fair value intrinsic value of the stock we can use the dividend discount model According to the problem XYZ Corporation is expected t... View the full answer