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Ch9Solutions

# Ch9Solutions - Chapter 9 Problem Solutions 9-4 a The...

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9-4 a. The terminal, or horizon, date is the date when the growth rate becomes constant. This occurs at the end of Year 2. b. 0 1 2 3 | | | | 1.25 1.50 1.80 1.89 37.80 = 05 . 0 10 . 0 89 . 1 - The horizon, or terminal, value is the value at the horizon date of all dividends expected thereafter. In this problem it is calculated as follows: . 80 . 37 \$ 05 . 0 10 . 0 ) 05 . 1 ( 80 . 1 \$   = - c. The firm’s intrinsic value is calculated as the sum of the present value of all dividends during the supernormal growth period plus the present value of the terminal value. Using your financial calculator, enter the following inputs: CF 0 = 0, CF 1 = 1.50, CF 2 = 1.80 + 37.80 = 39.60, I/YR = 10, and then solve for NPV = \$34.09. 9-14 The problem asks you to determine the value of 3 P ˆ , 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: %. 3 03 . 0 g g 25 \$ 2 \$ 11 . 0 g P D r ˆ 0 1 s = = + = + = Step 3: Calculate 3 P ˆ : 3 P ˆ = 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 3 P ˆ : D 4 = D 1 (1 + g) 3 = \$2.00(1.03) 3 = \$2.1855. r

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Ch9Solutions - Chapter 9 Problem Solutions 9-4 a The...

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