1. HW Assignment 6      Chapter 9


HW Assignment 6      Chapter 9



HW Assignment 6          Chapter 9
 
9-11  First, solve for the current price.
 
 = D1/(rs – g)
 = $0.50/(0.12 – 0.07)
 = $10.00.
 

If the stock is in a constant growth state, the constant dividend growth rate is also the capital gains yield for the stock and the stock price growth rate. Hence, to find the price of the stock four years from today:
 = P0(1 + g)4
 = $10.00(1.07)4
 = $13.10796 ≈ $13.11.
9-16  Calculate the dividend cash flows and place them on a time line. Also, calculate the stock price at the end of the supernormal growth period, and include it, along with the dividend to be paid at t = 5, as CF5. Then, enter the cash flows as shown on the time line into the cash flow register, enter the required rate of return as I/YR = 15, and then find the value of the stock using the NPV calculation. Be sure to enter CF0 = 0, or else your answer will be incorrect.
 
D0 = 0; D1 = 0; D2 = 0; D3 = 1.00; D4 = 1.00(1.5) = 1.5; D5 = 1.00(1.5)2 = 2.25; D6 = 1.00(1.5)2(1.08) = $2.43. = ?
 
 0  1  2  3  4  5  6
 |  |  |  |  |  |  |

       1.00  1.50  2.25  2.43

 

 

 0.658          +34.714 =

 0.858

 18.378          36.964
 $19.894 =
 
= D6/(rs – g) = $2.43/(0.15 – 0.08) = $34.714. This is the stock price at the end of Year 5.
 
CF0 = 0; CF1-2 = 0; CF3 = 1.0; CF4 = 1.5; CF5 = 36.964; I/YR = 15%.
 

With these cash flows in the CFLO register, press NPV to get the value of the stock today: NPV = $19.89.

 
 
9-19    0  1  2  3  4
 |  |  |  |  |

D0 = 2.00  D1  D2  D3  D4
       
 
a.  D1 = $2(1.05) = $2.10; D2 = $2(1.05)2 = $2.2050; D3 = $2(1.05)3 = $2.31525.
 
b.  Financial calculator solution: Input 0, 2.10, 2.2050, and 2.31525 into the cash flow register, input I/YR = 12, PV = ? PV = $5.28.
 
c.  Financial calculator solution: Input 0, 0, 0, and 34.73 into the cash flow register, I/YR = 12, PV = ? PV = $24.72.
 
d.  $24.72 + $5.28 = $30.00 = Maximum price you should pay for the stock.
 
e.  
 


f.  No. The value of the stock is not dependent upon the holding period. The value calculated in Parts a through d is the value for a 3-year holding period. It is equal to the value calculated in Part e. Any other holding period would produce the same value of ; that is, = $30.00.
 

Back to top