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

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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
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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:
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= $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%.
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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
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Ch07 Solutions - Chapter 7 Stocks Stock Valuation and Stock...

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