1st assignment is:

Hamilton Landscaping’s dividend growth rate is expected to be

1st assignment is:

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?

D0

$2.50

rs

11.0%

g0,1

30%

Short-run g; for Year 1 only.

g1,2

15%

Short-run g; for Year 2 only.

gL

5%

Long-run g; for Year 3 and all following years.

g

30%

15%

5%

5%

Year

0

1

2

3

Dividend

PV of dividends and PV of horizon value

= D2 (1+g) = D3

= Horizon value = P2 =

= rs – gL

= P0

a. What is Hamilton’s estimated stock price for Year 1?

P1

=

P2

+

D2

(1 + rs)

P1

=

+

P1

=

b. If you bought the stock at Year 0, what your expected dividend yield and capital gains for the upcoming year?

1. Find the expected dividend yield.

Dividend yield =

D1

/

P0

Dividend yield =

/

Dividend yield =

2. Find the expected capital gains yield.

Use the estimated price for Year 1, P1, to find the expected gain.

Cap. Gain yield=

(P1 – P0)

/

P0

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 yield=

Expected return

–

Dividend yield

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

/

P1

Dividend yield =

/

Dividend yield =

2. Find the expected capital gains yield.

Use the estimated price for Year 2, P2, to find the expected gain.

Cap. Gain yield=

(P2 – P1)

/

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 yield=

Expected return

–

Dividend yield

Cap. Gain yield=

–

Cap. Gain yield=

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