Build a Model Chapter: Problem: 7 27 Valuation of Stocks and Corporations 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? D. $2.50 11.0% 90.1 30% Short-run g; for Yoar 1 only. 91.2 15% Short-run g; for Year 2 only. 9L 5% Long-run g; for Year 3 and all following years. 5% g Year Dividend 30% 1 15% 2 5% 3 0 PV of dividends and PV of horizon value = D2 (1+g) - D, = Horizon value = P2 = ET-9L = Po a. What is Hamilton's estimated stock price for Year 1? P2 + D2 P1 (1 + r) P1 P1 b. If you bought the stock at Year 0, what your expected dividend yield and capital gains for the upcoming year? Po 1. Find the expected dividend yield. Dividend yield- D 1 Dividend yield = 1 Dividend yield = 2. Find the expected capital gains yield. Use the estimated price for Year 1, P4, to find the expected gain. Cap. Gain yield= (P1-P) 1 Po Cap. Gain yield- 1 Cap. Gain yields Alternatively, the capital gains yield can be calculated by simply subtracting the dividend yield from the total expected return. Expected return Dividend yield Cap. Gain yields 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 1 P1 Dividend yield = 1 Dividend yield = 2. Find the expected capital gains yield. Use the estimated price for Year 2, Pz, to find the expected gain. Cap. Gain yield (P2-P) 1 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 yielde Expected return Dividend yield Cap. Gain yield= Cap. Gain yields 1