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Chap02 Pbms MBF12e

# Chap02 Pbms MBF12e - Problem 2.1 Suvari Returns If the...

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Problem 2.1 Suvari Returns Assumptions Value Share price, P1 \$16.00 Share price, P2 \$18.00 Dividend paid, D2 \$- a. If the company paid no dividend (plugging zero in for the dividend): Return = ( P2 - P1 + D2 ) / ( P1 ) 12.500% b. And if the company paid a \$1.00 dividend: Assumptions Value Share price, P1 \$16.00 Share price, P2 \$18.00 Dividend paid, D2 \$1.00 Total shareholder return, including dividends, is: 18.750% Return = ( P2 - P1 + D2 ) / ( P1 ) Dividend yield is D2 / P1 6.250% Capital gain is (P2 - P1) / (P1) 12.500% Total shareholder return is the sum of the two 18.750% If the share price of Suvari, a Florida-based shipping firm, rises from \$16.00 to \$18.00 over a one year period, what was the rate of return to the shareholder if: c. Assuming it did pay the dividend, separate the shareholder's total return into its two components -- the dividend yield and the capital gain.

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Problem 2.2 Fong's Choices Assumptions Value Share price, P1 \$62.00 Share price, P2 \$74.00 Dividend paid, D2 \$2.25 b. Total shareholder return for the period is 22.98% Return = (P2 - P1 + D2) / (P1) The share's expected return of 22.98% far exceeds the required return by Mr. Fong of 12%. He should therefore make the investment. Alexander Fong, a prominent investor, is evaluating investment alternatives. If he believes an individual equity will rise in price from \$62 to \$74 in the coming one year period, and the share is expected to pay a dividend of \$2.25 per share, and he expects at least a 12% rate of return on an investment of this type, should he invest in this particular equity?
Problem 2.3 Legrand Returns (A) Share Exchange Rate Assumptions Price Prices when Tony purchased his shares € 19.75 1.2250 Prices Tony sees in the market today € 25.28 1.4280 a. If Tony sold his shares today, what is the percentage change in the share price he would receive? Return = (P2 - P1) / (P1) 28.00% b. What has been the percentage change in the value of euro versus the dollar over this same period? 16.57% c. What would be the total return Tony would earn on his shares if he sold them at these rates? If he sold his shares today, it would yield the following amount in euros: € 2,528.00 These euros would in turn be worth the following in US dollars: \$3,609.98 Original investment (cost) of 100 shares in Legrand in euros: € 1,975.00 Original investment (cost) of shares in US dollars, calculated at original spot rate: \$2,419.38 The rate of return on Tony's investment, proceeds divided by initial investment: 49.21% (Remember to subtract 1, the value of the initial investment, when calculating return.) Percentage return = ( 1 + percent change in share price) x (1 + percent change in spot rate) - 1 Percentage return = ( 1 + .2800 ) x ( 1 + .1265 ) - 1 = 49.21% Tony Varga is a New York based investor. He has been following his investment in 100 shares of Legrand, a French firm which went public in March of 2005, very closely. When he purchased his 100 shares, at a price of 19.75 per share, the euro was trading at \$1.2250/ . Currently the share is trading at 25.28 per share, and the dollar has fallen to \$1.4280/ .

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