{[ promptMessage ]}

Bookmark it

{[ promptMessage ]}

Ch07 Solutions - Chapter 7 Stocks Stock Valuation and Stock...

Info iconThis preview shows pages 1–6. Sign up to view the full content.

View Full Document Right Arrow Icon
r s = 13% g n = 6% g 2 = 25% g 1 = 50% g = 50% g = 8% r s = 15% g = 5% r = 12% g = 15% g = 5% Stocks, Stock Valuation, and Stock Market Equilibrium 7-1 D 0 = $1.50; g 1-3 = 5%; g n = 10%; D 1 through D 5 = ? D 1 = D 0 (1 + g 1 ) = $1.50(1.05) = $1.5750. D 2 = D 0 (1 + g 1 )(1 + g 2 ) = $1.50(1.05) 2 = $1.6538. D 3 = D 0 (1 + g 1 )(1 + g 2 )(1 + g 3 ) = $1.50(1.05) 3 = $1.7364. D 4 = D 0 (1 + g 1 )(1 + g 2 )(1 + g 3 )(1 + g n ) = $1.50(1.05) 3 (1.10) = $1.9101. D 5 = D 0 (1 + g 1 )(1 + g 2 )(1 + g 3 )(1 + g n ) 2 = $1.50(1.05) 3 (1.10) 2 = $2.1011. 7-2 D 1 = $1.50; g = 7%; r s = 15%; = ? = = = $18.75. 7-3 P 0 = $20; D 0 = $1.00; g = 10%; = ?; s = ? = P 0 (1 + g) = $20(1.10) = $22. s = + g = + 0.10 = + 0.10 = 15.50%. s = 15.50%. 7-4 D ps = $5.00; V ps = $50; r ps = ? Chapter 7 SOLUTIONS TO END-OF-CHAPTER PROBLEMS
Background image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full Document Right Arrow Icon
r ps = = = 10%. 7-5 0 1 2 3 | | | | D 0 = 2.00 D 1 D 2 D 3 Step 1: Calculate the required rate of return on the stock: r s = r RF + (r M - r RF )b = 7.5% + (4%)1.2 = 12.3%. Step 2: Calculate the expected dividends: D 0 = $2.00 D 1 = $2.00(1.20) = $2.40 D 2 = $2.00(1.20) 2 = $2.88 D 3 = $2.88(1.07) = $3.08 Step 3: Calculate the PV of the expected dividends: PV Div = $2.40/(1.123) + $2.88/(1.123) 2 = $2.14 + $2.28 = $4.42. Step 4: Calculate : = D 3 /(r s – g) = $3.08/(0.123 – 0.07) = $58.11. Step 5: Calculate the PV of : PV = $58.11/(1.123) 2 = $46.08. Step 6: Sum the PVs to obtain the stock’s price:
Background image of page 2
= $4.42 + $46.08 = $50.50. Alternatively, using a financial calculator, input the following: CF 0 = 0, CF 1 = 2.40, and CF 2 = 60.99 (2.88 + 58.11) and then enter I/YR = 12.3 to solve for NPV = $50.50. 7-6 The problem asks you to determine the constant growth rate, given the following facts: P 0 = $80, D 1 = $4, and r s = 14%. Use the constant growth rate formula to calculate g: s = + g 0.14 = + g g = 0.09 = 9%.
Background image of page 3

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full Document Right Arrow Icon
7-7 The problem asks you to determine the value of , given the following facts: D 1 = $2, b = 0.9, r RF = 5.6%, RP M = 6%, and P 0 = $25. Proceed as follows: Step 1: Calculate the required rate of return: r s = r RF + (r M – r RF )b = 5.6% + (6%)0.9 = 11%. Step 2: Use the constant growth rate formula to calculate g: s = + g 0.11 = + g g = 0.03 = 3%. Step 3: Calculate : = P 0 (1 + g) 3 = $25(1.03) 3 = $27.3182 ≈ $27.32. Alternatively, you could calculate D 4 and then use the constant growth rate formula to solve for : D 4 = D 1 (1 + g) 3 = $2.00(1.03) 3 = $2.1855. = $2.1855/(0.11 – 0.03) = $27.3188 $27.32. 7-8 V ps = D ps /r ps ; therefore, r ps = D ps /V ps . a. r ps = $8/$60 = 13.3%. b. r ps = $8/$80 = 10%.
Background image of page 4
c. r ps = $8/$100 = 8%. d. r ps = $8/$140 = 5.7%. 7-9 = = = = = $25.26. 7-10 a. r i = r RF + (r M - r RF )b i . r C = 9% + (13% – 9%)0.4 = 10.6%. r D = 9% + (13% – 9%)-0.5 = 7%. Note that r D is below the risk-free rate. But since this stock is like an insurance policy because it “pays off” when something bad happens (the market falls), the low return is not unreasonable.
Background image of page 5

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full Document Right Arrow Icon
Image of page 6
This is the end of the preview. Sign up to access the rest of the document.

{[ snackBarMessage ]}