Stock Valuation
Problem Set
Question 1. Suppose you bought one share of Pouce Coupe Resorts (PCR) one year
ago for $9. Today, you received a dividend payment of $1 and sold the share for $9.50. What
was your realized return on PCR over the last year?
Answer. Timeline:
Year 0 (last year) 1 (today)
Price P0 = 9 P1 = 9.50
Dividend D1 = 1
The realized return is calculated as
P1 + D 1 − P0 9.5 + 1 − 9
r= = = 0.166 666 67
P0 9
Question 2. Suppose you bought a share of Apple Computer one year ago for $51.
This morning you received a dividend of $0.48 and sold the share for $59. What was your
realized return?
Answer. Timeline:
Year 0 (last year) 1 (today)
Price P0 = 51 P1 = 59
Dividend D1 = 0.48
The realized return is calculated as
P1 + D1 − P0 59 + 0.48 − 51
r= = = 0.166 274 51
P0 51
Question 3. This morning, the Bank of Dawson Creek (BDC) paid a $2 dividend
(it pays dividends once per year) and these are expected to grow at the constant rate of 5%
per year. If the required return on BDC is 15%, calculate the current stock price of BDC.
Answer. Timeline:
Year 0 (today) 1 2 ...
2
Dividend D0 = 2 D1 = D0 (1 + 5%) D2 = D0 (1 + 5%) ...
Price P0 =?
Note that P0 is the PV of the dividend stream D1 , D2 , D3 ,....It doesn’t include D0 . P0
is the so called ex-dividend price. In other words, by purchasing the stock at P0 today,
you don’t get to receive today’s dividend D0 . The seller of the stock has claimed D0 before
selling the stock to you.
The price is given by
D1 D0 (1 + g) 2 (1 + 0.05)
P0 = = = = 21
r−g r−g 0.15 − 0.05
Question 4. Yesterday, the Hudson Hope Computer (HHC) announced a $3 dividend
to be paid in one year’s time. If the current price of HHC is $30 and the required return on
HHC is 20%, what is the (constant) growth rate consistent with the current stock price?
Answer. Timeline:
1
Problem Set
Question 1. Suppose you bought one share of Pouce Coupe Resorts (PCR) one year
ago for $9. Today, you received a dividend payment of $1 and sold the share for $9.50. What
was your realized return on PCR over the last year?
Answer. Timeline:
Year 0 (last year) 1 (today)
Price P0 = 9 P1 = 9.50
Dividend D1 = 1
The realized return is calculated as
P1 + D 1 − P0 9.5 + 1 − 9
r= = = 0.166 666 67
P0 9
Question 2. Suppose you bought a share of Apple Computer one year ago for $51.
This morning you received a dividend of $0.48 and sold the share for $59. What was your
realized return?
Answer. Timeline:
Year 0 (last year) 1 (today)
Price P0 = 51 P1 = 59
Dividend D1 = 0.48
The realized return is calculated as
P1 + D1 − P0 59 + 0.48 − 51
r= = = 0.166 274 51
P0 51
Question 3. This morning, the Bank of Dawson Creek (BDC) paid a $2 dividend
(it pays dividends once per year) and these are expected to grow at the constant rate of 5%
per year. If the required return on BDC is 15%, calculate the current stock price of BDC.
Answer. Timeline:
Year 0 (today) 1 2 ...
2
Dividend D0 = 2 D1 = D0 (1 + 5%) D2 = D0 (1 + 5%) ...
Price P0 =?
Note that P0 is the PV of the dividend stream D1 , D2 , D3 ,....It doesn’t include D0 . P0
is the so called ex-dividend price. In other words, by purchasing the stock at P0 today,
you don’t get to receive today’s dividend D0 . The seller of the stock has claimed D0 before
selling the stock to you.
The price is given by
D1 D0 (1 + g) 2 (1 + 0.05)
P0 = = = = 21
r−g r−g 0.15 − 0.05
Question 4. Yesterday, the Hudson Hope Computer (HHC) announced a $3 dividend
to be paid in one year’s time. If the current price of HHC is $30 and the required return on
HHC is 20%, what is the (constant) growth rate consistent with the current stock price?
Answer. Timeline:
1
