Question

I would appreciate it if someone can find the highlighted boxes, and explain what does the required return mean?

Clorox Dividend History PVs -year 1, FVe eyear 5, ne number of years-1, solve i Caterpillar Inc Clorox 2012 20 20 $1.962 $2.48 S2 Caterpillar Stock Valuation Stock values D 1 / (Required Return-Growth) Do Di Required return Growth Stock valuation Stock Price $3.08 18.0% $136.62 Clorox stock valuation Stock value D,/(Required Return-Growth) Do $3.14 D1 Required return Growth Stock valuation Stock Price 8.5% $128.11

Answer 1

	Caterpillar
	D1=Dividend of year1
	D0=dividend in year 0
	g= growth rate
	D1=D0*(1+g)
	R=Required rate of return
	Price (P0)=D1/(R-g)
	D0=dividend in year 0	$3.08
	R= Required return=18%	0.18
	Price=$136.62=(3.08*(1+g)/(0.18-g)
	136.62*(0.18-g)=3.08*(1+g)
	24.5916-136.62*g=3.08+3.08g		24.5916
	139.7*g=24.5916-3.08			21.5116
	g= growth rate=21.5116/139.7=	0.153984
	Growth =15.4%
	D1=3.08*(1+0.154)=	$3.55
	D0	$3.08
	D1	$3.55
	Required Return	18%
	Growth	15.4%
	Stock valuation=3.55/(0.18-0.154)	$136.62
	Clorox
	D1=Dividend of year1
	D0=dividend in year 0
	g= growth rate
	D1=D0*(1+g)
	R=Required rate of return
	Price (P0)=D1/(R-g)
	D0=dividend in year 0	$3.14
	R= Required return=8.5%	0.085
	Price=$128.11=(3.14*(1+g)/(0.085-g)
	128.11*(0.085-g)=3.14*g+3.14
	10.88935-128.11*g=3.14*g+3.14		10.88935	7.74935
	131.25*g=10.88935-3.14=7.74935		131.25
	g= growth rate=7.74935/131.25=	0.059043
	Growth =5.9%
	D1=3.14*(1+0.059)=	$3.33
	D0	$3.14
	D1	$3.33
	Required Return	8.5%
	Growth	5.9%
	Stock valuation=3.33/(0.085-0.059)	$128.11