Actuarial Outpost Stock question
 Register Blogs Wiki FAQ Calendar Search Today's Posts Mark Forums Read
 FlashChat Actuarial Discussion Preliminary Exams CAS/SOA Exams Cyberchat Around the World Suggestions

 Enter your email to subscribe to DW Simpson weekly actuarial job updates. li.signup { display: block; text-align: center; text-size: .8; padding: 0px; margin: 8px; float: left; } Entry Level Casualty Health Life Pension All Jobs

#1
11-13-2017, 06:18 PM
 Futon Member SOA Join Date: Jul 2016 Studying for FM Posts: 128
Stock question

A common stock will pay 2 per share in dividends at the end of the current year. You are given that the earnings of the corporation increase 7% per year indefinitely, the number of shares increases 4% per year indefinitely, and that the corporation plans to continue to pay the same percentage of its earnings in dividends.

The price of the stock 10 years from the beginning of the current year will be X. At that time, the annual effective interest rate is assumed to be 10%.

Calculate X using the dividend discount model.
(A) 36.32
(B) 36.91
(C) 37.35
(D) 37.97
(E) 38.55

I'm not sure what I'm supposed to do here. I'm armed with P=D/(i-k).
#2
11-13-2017, 10:40 PM
 Academic Actuary Member Join Date: Sep 2009 Posts: 7,073

Quote:
 Originally Posted by Futon A common stock will pay 2 per share in dividends at the end of the current year. You are given that the earnings of the corporation increase 7% per year indefinitely, the number of shares increases 4% per year indefinitely, and that the corporation plans to continue to pay the same percentage of its earnings in dividends. The price of the stock 10 years from the beginning of the current year will be X. At that time, the annual effective interest rate is assumed to be 10%. Calculate X using the dividend discount model. (A) 36.32 (B) 36.91 (C) 37.35 (D) 37.97 (E) 38.55 I'm not sure what I'm supposed to do here. I'm armed with P=D/(i-k).
You need to forecast the dividend per share at time 11. The k is the growth rate in dividends per share.
#3
11-15-2017, 02:19 PM
 Futon Member SOA Join Date: Jul 2016 Studying for FM Posts: 128

Quote:
 Originally Posted by Academic Actuary You need to forecast the dividend per share at time 11. The k is the growth rate in dividends per share.
Thanks.

How do I figure out what the dividend is when I'm just given the price? Is it 2=D/(.1-.07)? And what is the relationship between time and the stock price/dividend?
#4
11-15-2017, 11:05 PM
 Academic Actuary Member Join Date: Sep 2009 Posts: 7,073

The assumption of the model is a constant payout ratio so the stock price, earnings per share and the dividend all grow at the same rate. So the dividend yield dividend/stock price is a constant.

 Thread Tools Display Modes Linear Mode

 Posting Rules You may not post new threads You may not post replies You may not post attachments You may not edit your posts BB code is On Smilies are On [IMG] code is On HTML code is Off

All times are GMT -4. The time now is 02:17 PM.

 -- Default Style - Fluid Width ---- Default Style - Fixed Width ---- Old Default Style ---- Easy on the eyes ---- Smooth Darkness ---- Chestnut ---- Apple-ish Style ---- If Apples were blue ---- If Apples were green ---- If Apples were purple ---- Halloween 2007 ---- B&W ---- Halloween ---- AO Christmas Theme ---- Turkey Day Theme ---- AO 2007 beta ---- 4th Of July Contact Us - Actuarial Outpost - Archive - Privacy Statement - Top