Module 3 Work

# Module 3 Work - P 7-9 Common stock valueConstant growth Use...

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model) to find the value of each firm shown in the following table. Firm Dividend expected next year Dividend growth rate Required return P0 = D1 (Pg: 513 in book) rs - g P0= value of common stock D1= per-share dividend expected at the end of year 1 rs= required return on common stock g= constant rate of growth in dividends * I hope this was ok to do I showed the written work for one example and just used the firmulas for the rest as proof of my work For Firm A. d1= 1.20 rs=.13 g= .08 P0= 1.2 P0= 1.2 P0= 24 .13 - .08 0.05 Table: Firm Dividend expected next year Dividend growth rate Required Return A \$1.20 8% 13% B \$4.00 5% 15% C \$0.65 10% 14% D \$6.00 8% 9% E \$2.25 8% 20% P 7-9 Common stock value—Constant growth Use the constant-growth model (Gordon Firm Dividend expected next year Dividend growth rate Required Return A \$1.20 8% 13% B \$4.00 5 15 C 0.65 10 14 D 6.00 8 9 E 2.25 8 20

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Value of each firm \$24.00 \$40.00 \$16.25 \$600.00 \$18.75
Grips’ earnings and dividends are expected to grow at 25% per year for the next 3 years, after which they are expected What is the maximum price per share that Newman should pay for Grips if it has a required return of 15% on investments with risk characteristics similar to those of Grips? * Page #/ fo D1 = \$2.55 (D0) x 1.25 = \$3.1875 D2 = \$3.1875 x 1.25 = \$3.984 ; PV of D2 = 3.984/(1+.15)2 = 3.0125 D3= \$3.984 x 1.25 = \$4.98 D4 = \$4.98 x 1.10 (g2) = \$5.478 Sum of PV = 2.7717 + 3.0125 + 3.2744 = 9.0586 Value of stock at the end of initial growth period (P3) = D4/(r-g2)= 5.478/(15% - 10%) \$109.56 Present value (PV) of value of stock at the end the end of year 3 = 109.56/(1+.15)3 = \$72.04 stock at the end of Year 3 \$9.0586 + \$72.04 = \$81.098 Hopefully if I got this right the maximum price per share that Nerman would pay is equal after rounded P 7-12. Common stock value—Variable growth Newman Manufacturing is considering a cash purchase of the stoc During the year just completed, Grips earned \$4.25 per share and paid cash dividends of \$2.55 per share ( D 0 _\$2.55) ; PV of D1 = 3.1875/(1+.15) 1 = 2.7717 ; PV of D3 = 4.98/(1+.15) 3 = 3.2744 Current price/value of the stock, P 0 = Sum of PV of dividends in the initial growth period + PV of value

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d ormulas shown prvioulsy d to \$81.10. ck of Grips Tool. ). e of
should the Complex Systems bond sell for today? coupon interest rate on the Complex Systems bond.

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