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326fall07test2 prob soln

# 326fall07test2 prob soln - MGT 326 Fall 2007 Test 2 Problem...

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MGT 326 Fall 2007 Test 2 Problem Solutions 1 7. (Ch5) The stock of Jelly Bean Jim’s Confectionaries Inc. is currently selling for \$50 per share. The firm's dividends are expected to grow at a rate of 15% per year for the next four years (i.e. until t=4). After this time, the dividends are expected to grow at a constant rate of 7% per year for the foreseeable future. The firm pays annual dividends and plans to pay a dividend of \$1.80 at the end of this year (i.e. at t=1). The stock's required rate of return is 11%. Is this stock undervalued or overvalued and by how much? 1) Find D 2 , D 3 & D 4 : D 1 = \$1.8 Solution Opt 1: D 2 = \$1.8(1+0.15/1) = \$2.07 ; D 3 = \$0.83(1+0.15/1) = \$2.3805 ; D 4 = \$0.8611(1+0.15/1) = \$2.7376 Solution Opt 2: D 2 = \$1.8(1+0.15/1) = \$2.07 ; D 3 = \$1.8(1+0.15/1) 2 = \$2.3805 ; D 4 = \$1.8(1+0.15/1) 3 = \$2.7376 Solution Opt 3: D 2 =[P/Y=1,N=1, I/Y=15, PV=1.8; CPT,FV] \$2.07 ; 2) Find PV at t=0 of D 1 , D 2 , D 3 & D 4 and sum them Use Cash Flow Worksheet on your calculator CF, 2 nd , CLR WORK (Clear cash flow worksheet) 0, ENTER ↓, 1.8, ENTER ↓, ↓, 2.07, ENTER ↓, ↓, 2.3805, ENTER ↓, ↓, 2.7376, ENTER NPV, 11, ENTER ↓, CPT: NPV = \$6.8456 3) Find Horizon Value: D 4 (1 + g N

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