exam 2 review solutions

# exam 2 review solutions - Solutions to Chapter 6 Valuing...

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Unformatted text preview: Solutions to Chapter 6 Valuing Stocks 2. Dividend yield = Dividend/Price = DIV 1 /P 0.08 = 2.40/P ⇒ P = \$30 3. The preferred stock pays a level perpetuity of dividends. The expected dividend next year is the same as this year’s dividend (\$8). a. \$8.00/0.12 = \$66.67 b. \$8.00/0.12 = \$66.67 c. Dividend yield = \$8/\$66.67 = 0.12 =12% Capital gains yield = 0 Expected rate of return = 12% 4. r = DIV 1 /P + g = 8% + 5% = 13% 6. a.P = DIV 1 /(r - g) \$30 = \$3/(r - 0.04) ⇒ r =0.14 = 14% b. P = \$3/(0.165 - 0.04) = \$24 11. a.DIV 1 = \$1 × 1.04 = \$1.04 DIV 2 = \$1 × 1.04 2 = \$1.0816 DIV 3 = \$1 × 1.04 3 = \$1.1249 b. P = 00 . 13 \$ 04 . 12 . 04 . 1 \$ g r DIV 1 =- =- c. P 3 = 6237 . 14 \$ 04 . 12 . 04 . 1 1249 . 1 \$ g r DIV 4 =- × =- 6-1 d. Your payments will be: Year 1 Year 2 Year 3 DIV \$1.04 \$1.0816 \$1.1249 Selling Price 14.6237 Total Cash Flow \$1.04 \$1.0816 \$15.7486 PV of Cash Flow \$0.9286 \$0.8622 \$11.2095 Sum of PV = \$13.00, the same as the answer to part (b). 13. a. 50 . 31 \$ 05 . 15 . 05 . 1 3 \$ g r DIV P 1 =- × =- = b. 45 \$ 05 . 12 . 05 . 1 3 \$ P =- × = The lower discount rate makes the present value of future dividends higher. 14. g 14 . 5 \$ 50 \$- = ⇒ % . 4 04 . 50 \$ 5 \$ 14 . g = =- = 16. P = DIV 1 /(r - g) = \$2/(0.12 – 0.06) = \$33.33 19. a. 10 . 18 \$ ) 10 . 1 ( 20 \$ 50 . 1 \$ ) 10 . 1 ( 25 . 1 \$ 10 . 1 00 . 1 \$ P 3 2 = + + + = b. DIV 1 /P = \$1/\$18.10 = 0.0552 = 5.52% 30. a.DIV 1 = \$2 × 1.20 = \$2.40 b. DIV 1 = \$2.40 DIV 2 = \$2.88 DIV 3 = \$3.456 675 . 32 \$ 04 . 15 . 04 . 1 456 . 3 \$ P 3 =- × = 021 . 28 \$ ) 15 . 1 ( 675 . 32 \$ 456 . 3 \$ ) 15 . 1 ( 88 . 2 \$ 15 . 1 40 . 2 \$ P 3 2 = + + + = 6-2 41. DIV 1 = \$1 DIV 2 = \$2 DIV 3 = \$3 g = 0.06 ⇒ P 3 = (\$3 × 1.06)/(0.14 – 0.06) = \$39.75 27 . 31 \$ ) 14 . 1 ( 75 . 39 \$ 3 \$ ) 14 . 1 ( 2 \$ 14 . 1 1 \$ P 3 2 = + + + = 43. a.DIV 1 = 1.00 × 1.20 = \$1.20 DIV 2 = 1.00 × (1.20) 2 = \$1.44 DIV 3 = 1.00 × (1.20) 3 = \$1.728 DIV 4 = 1.00 × (1.20) 4 = \$2.0736 b. P 4 = DIV 5 /(r - g) = [DIV 4 × (1 + g)]/(r - g) = (\$2.0736 × 1.05)/(0.10 – 0.05) = \$43.5456 c. 738 . 34 \$ ) 10 . 1 ( 5456 . 43 \$ 0736 . 2 \$ ) 10 . 1 ( 728 . 1 \$ ) 10 . 1 ( 44 . 1 \$ 10 . 1 20 . 1 \$ P 4 3 2 = + + + + = d. DIV 1 /P = \$1.20/\$34.738 = 0.0345 = 3.45% 6-3 Solutions to Chapter 7 Net Present Value and Other Investment Criteria 9. NPV = - \$3,000 + [\$800 × annuity factor(10%, 6 years)] = – 21 . 484 \$...
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exam 2 review solutions - Solutions to Chapter 6 Valuing...

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