Solutions+Problem+Set+6-1

# Solutions+Problem+Set+6-1 - (or we can solve this from...

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E120 Principles of Engineering Economics Fall 2010 Problem Set #6 Solutions 1. 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% 2. If the dividends are paid quarterly, we can value them as a perpetuity using a quarterly discount rate of (1.15) 0.25 - 1 = 3.556%, then P = \$0.50/0.03556 = \$14.06. 3. a. Equation 9.7 implies that r E = Dividend Yield + g, so g = 8% - 1.5% = 6.5% b. With constant dividend growth rate, share price is also expected to grow at g = 6.5%
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Unformatted text preview: (or we can solve this from Equation 9.2) 4. Value of the first 5 dividend payments is given by PV 1-5 = \$0.65/(0.08 – 0.12) × (1 – (1.12/1.08) 5 ) = \$3.24 Value on date 5 of the rest of the dividend payments is given by PV 5 = \$0.65 × (1.12) 4 × 1.02 / (0.08 – 0.02) = \$17.39 Discounting this value to the present gives PV = \$17.39 / (1.08) 5 = \$11.83 So the value of Gillette is: P = PV 1-5 + PV = \$3.24 + \$11.83 = \$15.07....
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