Ch.8 Problem Solutions

Ch.8 Problem Solutions - CHAPTER 8 8-1 DPS CALCULATION WARR...

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Unformatted text preview: CHAPTER 8 8-1 DPS CALCULATION WARR CORPORATION just paid a dividend of \$1.50 a share (i.e., D =\$1.50). The dividend is expected to grow 5 percent a year for the next 3 years, and then 10 percent a year thereafter. WHAT IS THE EXPECTED DIVIDEND PER SHARE FOR EACH OF THE NEXT 5 YEARS? ? %; 10 %; 5 ; 50 . 1 \$ 5 1 3 1 = = = =- D through D g g D n . 1011 . 2 \$ ) 10 . 1 ( ) 05 . 1 ( 50 . 1 \$ ) 1 ( ) 1 ( ) 1 ( ) 1 ( . 9101 . 1 \$ ) 10 . 1 ( ) 05 . 1 ( 50 . 1 \$ ) 1 ( ) 1 ( ) 1 ( ) 1 ( . 7364 . 1 \$ ) 05 . 1 ( 50 . 1 \$ ) 1 ( ) 1 ( ) 1 ( . 6538 . 1 \$ ) 05 . 1 ( 50 . 1 \$ ) 1 ( ) 1 ( . 5750 . 1 \$ ) 05 . 1 ( 50 . 1 \$ ) 1 ( 2 3 2 3 2 1 5 3 3 2 1 4 3 3 2 1 3 2 2 1 2 1 1 = = + + + + = = = + + + + = = = + + + = = = + + = = = + = n n g g g g D D g g g g D D g g g D D g g D D g D D 1 8-2 CONSTANT GROWTH VALUATION THOMAS BROTHERS is expected to pay a \$0.50 per share dividend at the end of the year (i.e., D 1 =\$0.50). The dividend is expected to grow at a constant rate of 7 percent a year. The required rate of return on the stock, k s , is 15 percent. WHAT IS THE VALUE PER SHARE OF THE COMPANYS STOCK? D 1 = \$0.50 g = 7% k s = 15% ? = P 25 . 6 \$ 07 . 15 . 50 . \$ 1 =- =- = g k D P s 2 8-3 CONSTANT GROWTH VALUATION HARRISON CLOTHIERS stock currently sells for \$20 a share. The stock just paid a dividend of \$1.00 a share (i.e., D =\$1.00). The dividend is expected to grow at a constant rate of 10 percent a year. WHAT STOCK PRICE IS EXPECTED 1 YEAR FROM NOW? WHAT IS THE REQUIRED RATE OF RETURN ON THE COMPANYS STOCK? P = \$20 D = \$1.00 g = 10% 1 P = ? k s = ? ( 29 ( 29 ( 29 % 50 . 15 k %. 50 . 15 10 . 20 \$ 10 . 1 \$ 10 . 20 \$ 10 . 1 00 . 1 \$ g P D k 22 \$ 10 . 1 20 \$ g 1 P P s 1 s 1 = = + = + = + = = = + = 3 8-4 PREFERRED STOCK VALUATION FEE FOUNDERS has preferred stock outstanding that pays a dividend of \$5 at the end of each year. The preferred stock sells for \$60 a share. WHAT IS THE PREFERRED STOCKS REQUIRED RATE OF RETURN? D p = \$5.00 V p = \$60 K p = ? % 33 . 8 00 . 60 \$ 00 . 5 \$ = = = p p p V D k 4 8-5 SUPERNORMAL GROWTH VALUATION HART ENTERPRISES recently paid a dividend, D , of \$1.25. The company expects to have supernormal growth of 20 percent for 2 years before the dividend is expected to grow at a constant rate of 5 percent. The firms cost of equity is 10 percent. A. WHAT YEAR IS THE TERMINAL, OR HORIZON, DATE? B. WHAT IS THE FIRMS HORIZON, OR TERMINAL, VALUE? C. WHAT IS THE FIRMS INTRINSIC VALUE OF TODAY, P ? ____________________________________________________________ a. Horizon Date: The terminal, or horizon, date is the date when the growth rate becomes constant. This occurs at the end of Year 2. b. Horizon Value : g k D P s 1 N N- = + = g k D s 3- ( 29 g k g 1 D P s 1 2 2- + = = = g k D s 3- 1 2 3 k s = 10% g s = 20% g s = 20% g n = 5% 1.25 1.50 1.80 1.89 The horizon, or terminal, value is the value at the horizon date of all dividends expected thereafter. In this problem it is calculated as follows: 05 . 10 ....
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This homework help was uploaded on 04/15/2008 for the course FIN 321 taught by Professor Kelley during the Spring '08 term at Loyola Maryland.

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Ch.8 Problem Solutions - CHAPTER 8 8-1 DPS CALCULATION WARR...

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