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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