Ch08sol - H8.1. Solution to Problem 8.1. 8.1. Stock Values:...

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H8.1. Solution to Problem 8.1. 8.1. Stock Values: Belarus Bearings just paid a dividend of BYR 7.20 per share on its stock. The dividends are expected to grow at a constant rate of 6% per year, indefinitely. If investors require a 12% return on Belarus Bearings stock, what is the current price? What will the price be in three years? In 15 years? The constant dividend growth model is: P t = D t × (1 + g) / ( R g ) So the price of the stock today is: P 0 = D 0 (1 + g) / (R – g) = BYR 7.20 (1.06) / (.12 – .06) = BYR 127.20 The dividend at year 4 is the dividend today times the FVIF for the growth rate in dividends and four years, so: P 3 = D 3 (1 + g ) / (R – g) = D 0 (1 + g) 4 / (R – g) = BYR 7.20 (1.06) 4 / (.12 – .06) = BYR 151.50 We can do the same thing to find the dividend in Year 16, which gives us the price in Year 15, so: P 15 = D 15 (1 + g) / (R – g) = D 0 (1 + g) 16 / (R – g) = 7.20 (1.06) 16 / (.12 – .06)

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H8.2. Solution to Problem 8.1. (continued) There is another feature of the constant dividend growth model: The stock price grows at the dividend growth rate. So, if we know the stock price today, we can find the future value for any time in the future we want to calculate the stock price. In this problem, we want to know the stock price in three years, and we have already calculated the stock price today. The stock price in three years will be: P 3 = P 0 (1 + g) 3 = BYR 127.20(1 + .06) 3 = BYR 151.50 And the stock price in 15 years will be: P 15 = P 0 (1 + g) 15 = BYR 127.20(1 + .06) 15 = BYR 304.84
H8.3. Solution to Problem 8.8. 8.8. Valuing Preferred Stock: Ayden, Inc., has an issue of preferred stock outstanding that pays an \$9.50 dividend every year in perpetuity. If this issue currently sells for \$120 per share, what is the required return? The price a share of preferred stock is the dividend divided by the required return.

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This note was uploaded on 04/13/2010 for the course TECHNOLOGY 032913 taught by Professor Hong during the Spring '08 term at 서울대학교.

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Ch08sol - H8.1. Solution to Problem 8.1. 8.1. Stock Values:...

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