University of Hong Kong
Department of Economics and Finance
FINA 2802C – Investment and Portfolio Analysis
First Semester: 20072008
Dr. KamMing Wan
Problem Set 4
Due Date: November 29, 2007 (Thur. by 9:30am)
1)
Dividend Growth Model
Yahoo—the online search engine has made $0.20 per share in the last quarter of 1998.
For simplicity, suppose they have a policy to pay out 50% of their earnings as dividend.
Due to economic slowdown, earnings are not expected to grow for the next five years
(a)
Suppose you just bought a share of Yahoo and expect to receive the first dividend
at the end of this quarter, what is the present value of the next five years of dividends?
(Assume that 20% is the appropriate annual discount rate quoted on a quarterly basis,
i.e., the right discount rate is 5% per quarter).
(b)
Assume that in five years from now you will only be able to sell your stock at
$150. What is the present value of your proceeds from selling the stock?
Use the
same discount rate.
(c)
How much you must have paid for the share of Yahoo? (Hint: If you are rational,
it must be the present value of your investment in Yahoo.)
Assume now that the
quarterly
earnings are expected to grow (so are the dividends)
at a constant rate per quarterly forever. 20% is still the appropriate
annual
discount
rate.
(d)
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 Spring '09
 GUAN
 Joseph Jones

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