ASSN $29$ Ch $09-$ Video Lesson $-$ Stocks and Their Valuation

The dividend yield for period $1$ is $$ and it will $$ each period.

The capital gain yield expected during period $1$ i $$ and it will $$ each period.

If it is forecasted that the total return equals $10\mathrm{.}00\%$ for the next $5$ years, what is the forecasted total return out to infinity?

$3\mathrm{.}50\%$

$6\mathrm{.}50\%$

$10\mathrm{.}00\%$

$13\mathrm{.}50\%$

Note that this stock is called a "Hold" as its forecasted intrinsic value is equal to its current price widehat$(P_0)=\frac{D_1}{r_s-g}=\frac{\text{\$}1\mathrm{.}04}{0\mathrm{.}1000-0\mathrm{.}0350}=$$$15\mathrm{.}85$ and the expected total return is equal to the required rate of return $r_s.$ If the market was more optimistic and the growth rate would be $5\mathrm{.}50\%$ rather than $3\mathrm{.}50\%,$ the stock's forecasted intrinsic value would be widehat$(P_0)=\frac{\text{\$}1\mathrm{.}04}{0\mathrm{.}1000-0\mathrm{.}0550}=$$$22\mathrm{.}89,$ which is greater than $$15\mathrm{.}85.$ In this case, you would call the stock a "Buy".

Suppose that the growth rate is expected to be $2\mathrm{.}50\%.$ In this case, the stock's forecasted intrinsic value would be $$ its current price, and the stock would be a $q,.$