hw_ch08 - CHAPTER 8 STOCK VALUATION Solutions to Questions...

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CHAPTER 8 STOCK VALUATION Solutions to Questions and Problems NOTE: All end of chapter problems were solved using a spreadsheet. Many problems require multiple steps. Due to space and readability constraints, when these intermediate steps are included in this solutions manual, rounding may appear to have occurred. However, the final answer for each problem is found without rounding during any step in the problem. Basic 1. The constant dividend growth model is: P t = D t × (1 + g ) / ( R g ) So the price of the stock today is: P 0 = D 0 (1 + g ) / ( R g ) = $1.95 (1.06) / (.11 – .06) = $41.34 The dividend at year 4 is the dividend today times the FVIF for the growth rate in dividends and four years, so: P 3 = D 3 (1 + g ) / ( R g ) = D 0 (1 + g) 4 / ( R g ) = $1.95 (1.06) 4 / (.11 – .06) = $49.24 We can do the same thing to find the dividend in Year 16, which gives us the price in Year 15, so: P 15 = D 15 (1 + g ) / ( R g ) = D 0 (1 + g) 16 / ( R g ) = $1.95 (1.06) 16 / (.11 – .06) = $99.07 There is another feature of the constant dividend growth model: The stock price grows at the dividend
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This note was uploaded on 03/21/2011 for the course FIN 390 taught by Professor Wilson during the Spring '08 term at Metro State.

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hw_ch08 - CHAPTER 8 STOCK VALUATION Solutions to Questions...

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