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AEM 428
Spring 2009
Professor Manny Dong
Problem Set 1
1)
Please provide on a separate sheet an introduction of yourself.
Attach a picture to
that. List your year, name, major, and a brief description of one or more of the
following: career goal, hobby, or reason for taking this class.
2)
At the beginning of 1968 General Foods (GF) had just paid a dividend of $2.20
per share, and its stock price was $73.50. Given the dividend history of the
company for the past 10 years, use the Gordon formula to estimate the cost of
equity:
YearEnd
Dividend
1958
$1.00
1959
$1.15
1960
$1.30
1961
$1.40
1962
$1.60
1963
$1.80
1964
$2.00
1965
$2.00
1966
$2.10
1967
$2.20
Ans: (note: treat the beginning of 1968 the same as the end of 1967, which is our time 0)
Recall Gordon Growth Model i.e. P = D/(rg)
Cost of equity according to Gordon Growth Model is: r = D/P + g
Average growth rate using the average of growth rate in past 10 years: 9.27%
Expected end of 1968 dividend = 2.2*(1+9.27%) =2.40
Share price at the beginning of 1968 = 73.50
D/P = 2.40 / 73.50 = 3.27%
Cost of equity = D/P + Dividend Growth
= 3.27 + 9.27 = 12.54%
3) The XYZ corp. has just paid a dividend of $4 per share. You believe that this dividend,
paid annually, will grow by 20% per year for the next 5 years, and will then grow by 8%
annually forever. XYZ currently trades for $63 per share. What is the discount rate
implied by this price? (just set this one up. If you have a financial calculator, then solve
it, otherwise setting it up is fine).
Ans:
Price equals to the sum of two parts.
First, dividends next five years are discounted to
today’s value.
Each year dividend grows by 20%.
Second, at the end of fifth year,
the discounted value of the value at that point.
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This note was uploaded on 09/23/2009 for the course AEM 4280 taught by Professor Ng,d. during the Spring '08 term at Cornell University (Engineering School).
 Spring '08
 NG,D.

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