fm3_problems02 - ABC CORP. 50 3 Dividend growth rate, g 5%...

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Unformatted text preview: ABC CORP. 50 3 Dividend growth rate, g 5% Cost of equity from Gordon model 11.300% #MACRO? Current stock price, P Current dividend, D UNHEARDOF, INC. 5 Anticipated dividend growth rate, g 15% 25% Gordon model stock price 57.5 #MACRO? Current dividend, D Cost of equity, r E DISMAL.COM Dividend, starting in 3 years 15 Growth rate 20% Cost of equity 35% Value of Dismal.com 3 years from today 15 Value of Dismal.com stock 2 years from today 100 Today's stock price 54.87 #MACRO? Explanation: At the end of 2 years, the next dividend will be 15, and this dividend will grow at 20% per year.Thus the Gordon model applies, and the stock price at the end of 2 years will be 15/(0.35-0.20). Today's stock price is the price 2 years from now discounted at the cost of equity. CHRYSLER CORPORATION (C) Year 1986 0.40 1987 0.50 25.00% #MACRO? 1988 0.50 0.00% #MACRO? 1989 0.60 20.00% #MACRO? 1990 0.60 0.00% #MACRO? 1991 0.30-50.00% #MACRO? 1992 0.30 0.00% 1993 0.33 10.00% 1994 0.45 36.36% 1995 1.00 122.22% 1996 35.00 1.40 40.00% Compound growth, 10 yr. 13.35% ### Compound growth, 5 yr. 36.08% ### Gordon model 35.00 <-- Ending 1996 share price 1.40 <-- 1996 dividend 10-yr. growth 17.88% ### 5-yr. growth 41.53% ### Year-end stock price Dividend per share Growth rate P D r E A B C D E 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 TRANSCONTINENTAL A 65.00 Current dividend per share 3.00 23.00% Number of high-growth years, m 5 5% #MACRO? Current stock price, P High growth rate, g high Normal growth rate, g normal Cost of equity, r E using the function twostagegordon A B 1 2 3 4 5 6 7 8 9 IRWAYS #MACRO? C 1 2 3 4 5 6 7 8 9 ABC Corp ("supernormal" growth) Current dividend 3.00 Dividend valuation 15% PV of years 1-10 34.79 10% 214.92 Cost of equity 12% Share value 249.72 Year 1 3.45 #MACRO? 2 3.97 #MACRO? 3 4.56 #MACRO? 4 5.25 #MACRO? 5 6.03 6 6.94 7 7.98 8 9.18 9 10.55 #MACRO? 10 12.14 #MACRO? 11 13.35 #MACRO? 12 14.69 13 16.15 14 17.77 15 19.55 16 21.50 Growth rate g 1 , years 1-10 ("supernormal") Growth rate g 2 , years 11 - PV of years 11 - #MACRO? #MACRO? #MACRO? MERCK & CO. 2000-1991 1991 184 893-48-32 997 #MACRO? 1992 863 1,064-52-37 1,838 1993 371 1,174-83-31 1,431 1994 705 1,434-139-61 1,939 1995 1,571 1,540-264-119 2,727 1996 2,493 1,729-442-207 3,573 1997 2,573 2,040-413-333 3,867 1998 3,626 2,253-490-488 4,900 1999 3,582 2,590-323-401 5,447 2000 3,545 2,798-641-501 5,202 Growth 38.91% 13.53% 20.15% #MACRO? Purchase of treasury stock Cash dividends Proceeds from exercise of stock options Tax Benefits from exercise of stock options - computed Total equity cash flow 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 500 1,000 1,500 2,000 2,500 3,000 1,000 2,000 3,000 4,000 5,000 6,000 MERCK--Cash Dividends versus Total Equity Cash Flow, 1991-2000 Cash dividends Total equity cash flow Cash dividends Total equity cf A B C D E F G 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 93.63 Number of shares outstanding, end 2000...
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This note was uploaded on 01/23/2011 for the course FGB 780 taught by Professor Edwardchang during the Spring '09 term at Missouri State University-Springfield.

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fm3_problems02 - ABC CORP. 50 3 Dividend growth rate, g 5%...

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