chap9 HW problems

# chap9 HW problems - 5 Briley Inc is expected to pay equal...

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5. Briley, Inc., is expected to pay equal dividends at the end of each of the next two years. Thereafter, the dividend will grow at a constant annual rate of 6 percent, forever. The current stock price is \$31. Required: What is next year’s dividend payment if the required rate of return is 20 percent? (Do not include the dollar sign (\$). Round your answer to 2 decimal places. (e.g., 32.16)) Next year’s dividend payment \$ Explanation: Here we need to find the dividend next year for a stock with nonconstant growth. We know the stock price, the dividend growth rates, and the required return, but not the dividend. First, we need to realize that the dividend in Year 3 is the constant dividend times the FVIF. The dividend in Year 3 will be: D 3 = D(1.06) The equation for the stock price will be the present value of the constant dividends, plus the present value of the future stock price, or: P 0 = D / 1.2 + D/1.2 2 + D(1.06)/(0.2 – 0.06)]/1.2 2 \$38 = D / 1.2 + D/1.2 2 + D(1.06)/(0.2 – 0.06)]/1.2 2 We can factor out D 0 in the equation. Doing so, we get: \$38 = D{1/1.2 + 1/1.2 2 + [(1.06)/(0.2 – 0.06)] / 1.2 2 } Reducing the equation even further by solving all of the terms in the braces, we get: \$31 = D(6.7857) D = \$31 / 6.7857 = \$4.57 8. California Real Estate, Inc., expects to earn \$88 million per year in perpetuity if it does not undertake any new projects. The firm has an opportunity to invest \$16 million today and \$15

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million in one year in real estate. The new investment will generate annual earnings of \$16 million in perpetuity, beginning two years from today. The firm has 18 million shares of common stock outstanding, and the required rate of return on the stock is 15 percent. Land
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chap9 HW problems - 5 Briley Inc is expected to pay equal...

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