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 shouldnt be a surprise because this is exactly the markets 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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This note was uploaded on 03/18/2008 for the course ICE 303 taught by Professor Roberts during the Spring '08 term at UVA.

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