Homework_4_Solutions - 1 !"#e%"&k )*...

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Unformatted text preview: 1 !"#e%"&k )* +",-ti"0s FIN340 FALL 2006 Professor Gormley, gormley@wustl.edu Distributed: October 24th, 2006 2-e3 4-es567 9ct";e& <= st >??@ Ai0 c,6ssB C"te3 Please show all work and circle your final answer to make grading easier. Homework Assignments may be done in groups of up to four students. =D Es "F 9ctD =G >??@ Y6h""Ks st"ck L&ice %6s M>>DNN 605 its e6&0i0Os Le& sh6&e %6s M?DP*D +-LL"se 7"- 6&e thi0ki0O 6;"-t ;-7i0O this st"ckQ EFte& ,""ki0O "Re& Fi060ceDO""O,eDc"# 7"- ";se&Re th6t Y6h"" h6s0Kt L6i5 607 5iRi5e05s F"& the L6st 7e6&D !"%eRe& 6Fte& s"#e eSte0siRe &ese6&ch 7"- c"#e t" eSLect th6t Y6h"" %i,, L67 6 M?DP? 5iRi5e05 "0e 7e6& F&"# 0"% M= t%" 7e6&s F&"# 0"% M>DP? th&ee 7e6&s F&"# 0"% 605 the0 its 600-6, 5iRi5e05 %i,, O&"% 6t 6 &6te "F GT the&e6Fte&D +t"cks "F si#i,6& &isk t" Y6h"" 6&e c-&&e0t,7 L&"Ri5i0O 6 &et-&0 "F =PTD 6D !"% #-ch %i,, this st"ck se,, F"& 6Fte& the thi&5 5iRi5e05 L67#e0t "F M>DP?U ViDeD Wh6t is X < Uy After the third dividend payment, Yahoos dividend will grow at a constant rate 8%, and the first dividend one year away (i.e. D 4 )will be equal to $2.50 * 1.08 = $2.70. We can use the Gordon Growth Zodel to find its price in year three. 4 3 3 3 2.7 0.15 0.08 $38.57 e D P r g P P ! " ! " ! ;D Zsi0O 7"-& 60s%e& F&"# L6&t V6y %h6t is Y6h""Ks st"ck %"&th t"567U ViDeD Wh6t is X ? Uy To solve this question, we need to find what the stock is worth today based on our estimates of future dividend growth\ i.e. We need to solve for the following equation: 2 # $ # $ # $ 3 3 1 2 2 3 3 1 1 1 1 e e e e D P D D r r r r P % % % % ! % % % Plugging in for D 1 , D 2 , D 3 , and P 3 , we have # $ # $ # $ 2 3 3 0.50 2.5 38.57 1 1.15 1.15 1.15 1.15 $28.20 P P ! % % % ! cD +h"-,5 7"- ;-7 this st"ckU [SL,6i0 7"-& 60s%e& i0 => se0te0cesD Yes! You should buy the stock!!! The present value of its dividends is $28.20 which exceeds the price, $22.99. 5D Zsi0O Y6h""Ks c-&&e0t L&ice 605 e6&0i0Os Le& sh6&e %h6t is Y6h""Ks #6&ket X][ &6ti"U Yahoos market PE ratio is simply $22.99 $0.54 = 42.57 eD C"% F"&Oet 6;"-t 7"-& 6;"Re 6ss-#Lti"0s &eO6&5i0O eSLecte5 5iRi5e05sQ ^0ste65 6ss-#e th6t 7"- thi0k Y6h""!Ks F-t-&e 5iRi5e05 L67"-t &6ti" %i,, ;e ?D>?D Zsi0O the F-056#e0t6, X[ e_-6ti"0 605 7"-& 60s%e& t" L6&t V5y %h6t is the #i0i#-# &6te "F ,"0O&-0 O&"%th O Y6h""!Ks e6&0i0Os #-st 6chieRe s-ch th6t 7"- %"-,5 6ct-6,,7 thi0k this st"ck is -05e&R6,-e5 ;7 the #6&ketU Ai0t3 %he0 s",Ri0O F"& the #i0i#-# O 6ss-#e...
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This note was uploaded on 09/21/2009 for the course B 340 taught by Professor Narg during the Spring '09 term at Washington University in St. Louis.

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Homework_4_Solutions - 1 !"#e%"&k )*...

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