Answers to Assignment No. 5
Chapter 6- Questions and Problems:
Answer to Q 4
r = DIV
1
/P
0
+ g = 8% + 5% = 13%
Answer to Q 5
The value of a common stock equals the present value of dividends received out to the investment
horizon, plus the present value of the forecast stock price at the horizon. But the stock price at the horizon
date depends on expectations of dividends from that date forward. So even if an investor plans to hold a
stock for only a year for two, the price ultimately received from another investor depends on dividends to
be paid after the date of purchase. Therefore, the stock’s present value is the same for investors with
different time horizons.
Answer to Q 12
Dividend growth rate, g = return on equity × plowback ratio:
g = .15
×
.40 = .06
r =
DIV
1
P
0
+ g =
4
40
+ .06 = .16 = 16%
Answer to Q 16
P
0
= DIV
1
/(r
−
g)
= [$.50 x 1.06 / (.12 - .06)] / [(1 + .12)
4
] = $5.61
Answer to Q 27
a.
Plowback ratio = 0 implies DIV
1
= $3 and g = 0.
Therefore, P
0
=
3
.10
−
0
= $30 and the P/E ratio is 30/3 = 10.
b.
Plowback ratio = .40 implies DIV
1
= $3(1 – .40) = $1.80, and g = 10%
×
.40 = 4%.
Therefore P
0
= $1.80/(.10 – .04) = $30 and the P/E ratio is 30/3 = 10.

This
** preview**
has intentionally

**sections.**

*blurred***to view the full version.**

*Sign up*