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KeytoCH7HW

# KeytoCH7HW - Solutions to Chapter 7 Valuing Stocks 11 a...

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Solutions to Chapter 7 Valuing Stocks 11. a.DIV 1 = \$1 × 1.04 = \$1.04 DIV 2 = \$1 × 1.04 2 = \$1.0816 DIV 3 = \$1 × 1.04 3 = \$1.1249 b. P 0 = 00 . 13 \$ 04 . 0 12 . 0 04 . 1 \$ g r DIV 1 = - = - c. P 3 = 6237 . 14 \$ 04 . 0 12 . 0 04 . 1 1249 . 1 \$ g r DIV 4 = - × = - d. Your payments will be: Year 1 Year 2 Year 3 DIV \$1.04 \$1.0816 \$1.1249 Selling Price 14.6237 Total Cash Flow \$1.04 \$1.0816 \$15.7486 PV of Cash Flow \$0.9286 \$0.8622 \$11.2095 Sum of PV = \$13.00, the same as the answer to part (b). 12. g = return on equity × plowback ratio = 0.15 × 0.40 = 0.06 = 6.0% % 0 . 16 16 . 0 06 . 0 40 4 r 06 . 0 r 4 40 = = + = - = 13. a. 50 . 31 \$ 05 . 0 15 . 0 05 . 1 3 \$ g r DIV P 1 0 = - × = - = b. 45 \$ 05 . 0 12 . 0 05 . 1 3 \$ P 0 = - × = The lower discount rate makes the present value of future dividends higher. 14. g 14 . 0 5 \$ 50 \$ - = % 0 . 4 04 . 0 50 \$ 5 \$ 14 . 0 g = = - = 7-1

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18. a.(i) reinvest 0% of earnings: g = 0 and DIV 1 = \$6 00 . 40 \$ 0 15 . 0 6 \$ g r DIV P 1 0 = - = - = (ii) reinvest 40%: g = 15% × 0.40 = 6% and DIV 1 = \$6 × (1 – 0.40) = \$3.60 00 . 40 \$ 06 . 0 15 . 0 60 . 3 \$ g r DIV P 1 0 = - = - = (iii) reinvest 60%: g = 15% × 0.60 = 9% and DIV 1 = \$6 × (1 – 0.60) = \$2.40 00 . 40 \$ 09 . 0 15 . 0 40 . 2 \$ g r DIV P 1 0 = - = - = b. (i) reinvest 0%: 00 . 40 \$ 0 15 . 0 6 \$ P 0 = - = PVGO = \$0 (ii) reinvest 40%: 43 . 51 \$ ) 40 . 0 2 . 0 ( 15 . 0 60 . 3 \$ P 0 = × - = PVGO = \$51.43 – \$40.00 = \$11.43 (iii) reinvest 60%: 00 . 80 \$ ) 60 . 0 2 . 0 ( 15 . 0 40 . 2 \$ P 0 = × - = PVGO = \$80.00 – \$40.00 = \$40.00
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