BD_SM_c09

# BD_SM_c09 - Chapter 9 Valuing Stocks 9-1. a. b. c. P(0) =...

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Chapter 9 Valuing Stocks 9-1. a. P(0) = 2.80 / 1.10 + (3.00 + 52.00) / 1.10 2 = \$48.00 b. P(1) = (3.00 + 52.00) / 1.10 = \$50.00 c. P(0) = (2.80 + 50.00) / 1.10 = \$48.00 9-2. Dividend Yield = 0.88 / 22.00 = 4% Capital gain rate = (23.54 – 22.00) / 22.00 = 7% Total expected return = r E = 4% + 7% = 11% 9-3. P = 0.50 / 0.15 = \$3.33 9-4. P = 1.50 / (11% – 6%) = \$30 9-5. a. Eq 9.7 implies rE = Div Yld + g , so 8% – 1.5% = g = 6.5% b. With constant dividend growth, share price is also expected to grow at rate g = 6.5% (or we can solve this from Eq 9.2) 9-6. a. Eq 9.12: g = retention rate × return on new invest = (2/5) × 15% = 6% b. P = 3 / (12% – 6%) = \$50 c. g = (1/5) × 15% = 3%, P = 4 / (12% – 3%) = \$44.44. No, projects are positive NPV (return exceeds cost of capital), so don’t raise dividend. 9-7. Estimate r E : r E = Div Yield + g = 4 / 50 + 3% = 11% New Price: P = 2.50/(11% – 5%) = \$41.67 In this case, cutting the dividend to expand is not positive NPV.

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84 Berk/DeMarzo Corporate Finance 9-8. Value if the first 5 dividend payments () 5 15 0.65 1.12 PV 1 \$3.24 0.08 0.12 1.08 =− = ⎛⎞ ⎜⎟ ⎝⎠ Value on date 5 of the rest of the dividend payments 4 5 0.65 1.12 1.02 PV 17.39 0.08 0.02 == Discounting this value to the present gives 0 5 17.39 PV \$11.83 1.08 So the value of Gillette is: 0 P PV PV 3.24 11.83 \$15.07 =+ = += 9-9. PV of the first 5 dividends 5 first 5 0.96 1.11 1.11 PV 1 5.14217 0.085 0.11 1.085 = PV of the remaining dividends in year 5 ( ) 5 remaining in year 5 0.96 1.11 1.052 PV 51.5689 0.085 0.052 Discounting back to the present remaining 5 51.5689 PV 34.2957 1.085 Thus the price of Colgate is first 5 remaining P PV PV 39.4378 = 9-10. N n-year, constan t growth annuity PV of terminal value nn 11 1 1 0 12 n 1 1 1 constan t growth perpetuity pres Div 1 g 1 g Div P1 rg 1r 1r rg Div 1 g Div Div rg rg ++ + −+ + + ±²²²³ ² ² ² ´± ²
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## This note was uploaded on 10/08/2010 for the course ENGIN 120 taught by Professor Ilan during the Spring '08 term at Berkeley.

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BD_SM_c09 - Chapter 9 Valuing Stocks 9-1. a. b. c. P(0) =...

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