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Ch9ClassProblems

# Ch9ClassProblems - 1 Uneven dividend growth model problem...

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1. Uneven dividend growth model problem You want to value Maxima Machinery stock. You expect the firm to have a growth rate of 12% for the next two years, 9% for the succeeding two years, after which the firm’s growth will be a constant 4.5% per year. Maxima has just paid a dividend of \$2.00. If the discount rate is 10%, what is the price of the stock? Div 0 = \$2.00 Div 1 = 2(1.12) = 2.24 Div 2 = 2(1.12) 2 = 2.51 Div 3 = 2(1.12) 2 (1.09) = 2.73 Div 4 = 2(1.12) 2 (1.09) 2 = 2.98 Div 5 = 2(1.12) 2 (1.09) 2 (1.045) = 3.11 Value(year 4) = Div 5 /k-g = 3.11/.1-.045 = \$56.63 Timeline: Year 0 1 2 3 4 Value 0 2.24 2.52 2.73 2.98 56.63 59.61 Value(year 0) = Div 1 /1+k + Div 2 /(1+k) 2 + Div 3 /(1+k) 3 + Div 4 /(1+k) 4 + TerminalValue/(1+k) 4 = Value(year 0) = 2.24/1+.1 + 2.52/(1+.1) 2 + 2.73/(1+.1) 3 + 59.61/(1+.1) 4 = \$46.88 2. Using Multiples for Valuation Texaco wants to buy a chemicals plant. Exxon is in the chemicals business, and earns 20% of its net income from chemicals. The rest of Exxon’s earnings come

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Ch9ClassProblems - 1 Uneven dividend growth model problem...

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