bankco growth - Bankos Linear Growth Model Some firms...

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PETT LPT Banko’s Linear Growth Model Some firms choose to grow their dividend by a constant dollar amount each year instead of a constant growth rate. The intuition is basically the same, but the math is slightly different: PV 0 = DIV 0 + C (1+1/i) i i Where i is the discount rate (Rs) and c is the constant dollar dividend growth. NOTE – here, unlike the Gordon model discussed above, we use D0, NOT D1 1) Assume the stock of Company A has beta equal to 1.2. The risk free rate of interest is equal to 5% and the return on a stock with a beta equal to 1 is 11%. Assume that Company A has just paid a dividend of $3 and will increase this dividend at a constant rate of $.10 per year. What is the intrinsic value of a share of stock in Company A? 1) find Rs=Rrf+Beta(MRP) which is 5+1.2(11-5)=12.2% 2) P 0 =(3/.122)+[(.10/.122)(1 +1/.122)] =$32.13 2) Consider a stock that has just paid a dividend of $2 per share. This dividend is expected to grow at a constant rate of 5% per year for the next five years. Then it will grow by $.07 per year forever. Assume the required return is 11%. What is the intrinsic value (price) of the stock today? --------------------------5%-------------------------- 7% 0 1 2 3 4 5 6 2) Enter it into CFj-don’t include time period 0 value in CF 0 CFj 2.1 CFj 2.205 CFj 2 2.10 2.205 2.31 2.431 2.55256 2.62256 2.3125 CFj P 5 2.431 CFj 1) P 5 =(2.255256/.11) + (.07/.11) (1+1/.11)=29626 32,179 CFj (29626+ 2.55256) 11 I/YR NPV = $ 26.07 7) Assume that the Pure Expectations Theory of the term structure is correct. Also assume that at Year 2 you plan to buy a 3-year, zero-coupon Treasury bond that will mature for $10,000 (that is, you will hold the bond for Years 2, 3 and 4 and it will mature at the end of Year 4). Determine how much you would pay for this bond at Year 2. (if investing today) Nominal Rates =avg k* + avg I (if investing in future) Forward Rates= K* +IP Price = ($10,000) / (1.07)(1.08)(1.05) = $8,241.44 1) arithmetic average: r10,0 = [(r4,0)*(4) + (r6,4)*(6)] / 10 2) geometric average: r10,0 = [(1 + r4,0)4*(1 + r6,4)6]1/10 - 1.0 9) Assume that the real risk-free rate is expected to remain constant at 3 percent, that inflation is expected to be 2 percent a year for the next 3 years, and then 4 percent a year thereafter, and that the maturity risk premium is 0.1%(t - 1), where t equals the maturity of the bond (for example, the maturity risk premium on a 5- year bond is 0.4 percent). A 5-year corporate bond has a yield of 8.4 percent. Determine the yield on a 7-year corporate bond that has the same default risk and liquidity premiums as the 5-year corporate bond. The return on the 5-year corporate bond is calculated as follows
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This note was uploaded on 10/28/2008 for the course FIN 3403 taught by Professor Tapley during the Fall '06 term at University of Florida.

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bankco growth - Bankos Linear Growth Model Some firms...

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