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A B C D E F G H I
Build a Model Solution 11/26/2018
Chapter: 7 Valuation of Stocks and Corporations
Problem: 27
a. What is Hamilton’s estimated stock price today?
D0$2.50
PV of dividends and
PV of horizon value
$2.9279
3.0334 3.92438
= D2 (1+g) = D3
$53.0852 65.4063
= Horizon value = P2 =
6.0%
= rs – gL
$59.0465
= P0
a. What is Hamilton’s estimated stock price for Year 1?
1. Find the expected dividend yield.
2. Find the expected capital gains yield.
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%.
b. If you bought the stock at Year 0, what your expected dividend yield and capital gains for the upcoming
year?
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(P2 – P1) / P1
A B C D E F G H I
Use the estimated price for Year 1, P1, to find the expected gain.
Cap. Gain yield=
(P1 – P0) / P0
Cap. Gain yield= $3.25 / $59.0465
Cap. Gain yield= 5.50%
1. Find the expected dividend yield.
Dividend yield = D2/ P1
Dividend yield = $3.738 / $62.292
Dividend yield = 6.00%
2. Find the expected capital gains yield.
Use the estimated price for Year 2, P2, to find the expected gain.
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?