Question

Part II: Computation Questions (Each 10 points) 1. Compute the value of common stock: Upotonic.com. The company is expected to pay its dividends in a pattern provided below. Notice that the beta of this stock (Bup)-0.5, nv-296, and rmarket-8% Do $1.00 Di-$1.05 Dr-$1.1025 .(this dividend payment pattern continues.) 2. Compute the value of common stocks: Lypy.com. The company is estimated to pay dividends at a 30% growth rate up to two years from today. However, the di growth will be at the steady state rate of 5% (-3). Notice that the beta of this stock (,)-12, re-2%, and rmarket-8% Do- $0.50 Di $0.60 D-$0.72 D-$0.756 D-$0.7938... 21Page

Answer 1

1)

Expected return = Risk free return + beta * Market risk premium

= 2% + 0.5 * (8% -2%)

= 5%

Growth rate = 5%

D3 = 1.1025 * 1.05 = 1.157625

Value of common stock = 1.157625 / 0.05 = 23.15

2) Expected return = Risk free return + beta * Market risk premium

= 2% + 1.2 * (8% -2%)

= 9.2 %

G2 = 5%

P2 = 0.72 * 1.05 / (0.092 – 0.05)

= 18

	Div	PVF (9.2%)	PVCF
D0	0.5	1	0.5
D1	0.6	0.915751	0.549451
D2	0.72	0.8386	0.603792
P2	18	0.8386	15.0948
P0			16.75

Value of Stock = $ 16.75