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ICE COMM 303 Suggested Solutions to Selected Chapter 4 Probl

# ICE COMM 303 Suggested Solutions to Selected Chapter 4...

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Answers to Problems 4.20.The price of the stock would be determined using the zero growth model and dividing the \$8 dividend by the required rate of return of 10% (\$8 ÷ 0.10). This results in a price of \$80 per share. 4.25. To calculate the price of the stock now, we simply divided next year’s expected dividend, \$0.23, by the difference between the required rate of return and the dividend growth rate. This yields a price of \$0.23 ÷ (0.11 - 0.10) = \$23.00. Next, we have to calculate the expected price a year from now after the \$0.23 dividend has been paid. To do that, we need an estimate of the dividend two years in the future. If next year’s dividend is \$0.23, then the following year’s dividend should be 10 percent more or \$0.253 per share. This means that the price of Applebee’s stock, just after the \$0.23 dividend is paid should be \$0.253 ÷ (0.11 - 0.10) = \$25.30. Now calculate your rate of return. You purchase the stock for \$23.
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Unformatted text preview: One year later you receive a dividend of \$0.23 and you immediately sell the stock for \$25.30, generating a capital gain of \$2.30. Your total return is therefore (\$25.30 + \$0.23 - \$23.00) ÷ \$23.00 = 0.11 or 11%. That shouldn’t be a surprise because this is exactly the market’s required return on the stock. 4-30. a. Terminal value in 2012: 000 , 200 , 5 \$ 04 . 12 . ) 04 . 1 ( 000 , 400 \$ 2013 2012 =-=-= g r CF TV Year Free cash flow 1 (2008) \$250,000 2 (2009) 290,000 3 (2010) 320,000 4 (2011) 360,000 5 (2012) 400,000 + 5,200,000 = 5,600,000 Total company value 547 , 088 , 4 \$ 12 . 1 000 , 600 , 5 \$ 12 . 1 000 , 360 \$ 12 . 1 000 , 320 \$ 12 . 1 000 , 290 \$ 12 . 1 000 , 250 \$ 5 4 3 2 1 = + + + + = b. Common stock value = total value – debt value – preferred stock value = \$4,088,547 – \$1,400,000 -\$500,000 = \$2,188,547 c. Value per share = Common stock value/number of shares = \$2,188,547/220,000 = \$9.95/share...
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