# finance - 1 CHAPTER 8 8-1 DPS CALCULATION WARR CORPORATION...

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1 CHAPTER 8 8-1 DPS CALCULATION WARR CORPORATION just paid a dividend of \$1.50 a share (i.e., D 0 =\$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\$ 51310 DthroughDggD 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( 2323210533210433210322102101 nn ggggDDggggDD gggDDggDDgDD 2 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 COMPANY’S STOCK? D 1 = \$0.50 g = 7% k s = 15% ? 0 P 25.6\$07.015.050.0\$ 10 gkDP s 3 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 0 =\$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 COMPANY’S STOCK? P 0 = \$20 D 0 = \$1.00 g = 10% 1 P = ? k s = ? %50.15k %.50.1510.020\$10.1\$10.020\$10.100.1\$gPDk22\$10.120\$g1PP s01s01 4 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 STOCK’S REQUIRED RATE OF RETURN? D p = \$5.00 V p = \$60 K p = ? %33.800.60\$00.5\$ ppp VDk 5 8-5 SUPERNORMAL GROWTH VALUATION HART ENTERPRISES recently paid a dividend, D 0 , 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 firm’s cost of equity is 10 percent. A. WHAT YEAR IS THE TERMINAL, OR HORIZON, DATE? B. WHAT IS THE FIRM’S HORIZON, OR TERMINAL, VALUE? C. WHAT IS THE FIRM’S INTRINSIC VALUE OF TODAY, 0 ? ____________________________________________________________ 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 :gkDPˆ s1NN = gkD s3 gkg1DPˆ s122 = gkD s3 0 1 2 3 k s = 10% g s = 20%

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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: 05.010.0)05.1(80.1\$Pˆ 2 05.010.089.1Pˆ 2 80.37\$Pˆ 2 6 c. The firm’s intrinsic value is calculated as the sum of the present value of all dividends during the supernormal growth period plus the present value of the terminal value. Using your financial calculator, enter the following inputs: CF 0 = 0, CF 1 = 1.50, CF 2 = 1.80 + 37.80 = 39.60, I = 10, and then solve for NPV = \$34.09. 0 1 2 3 k s = 10% g s = 20% g s = 20% g n
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## This note was uploaded on 04/29/2009 for the course ART 4321 taught by Professor Lindsay during the Spring '09 term at American Academy of Art.

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finance - 1 CHAPTER 8 8-1 DPS CALCULATION WARR CORPORATION...

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