Solution
Chapter 8: Stock Valuation
Page 256 Questions: 11, 12, 14, 16, 17, 18
11.
Here we have a stock that pays no dividends for 10 years. Once the stock begins
paying dividends, it will have a constant growth rate of dividends. We can use the
constant growth model at that point. It is important to remember that general
constant dividend growth formula is:
P
t
= [D
t
× (1 +
g
)] / (
R
–
g
)
This means that since we will use the dividend in Year 10, we will be finding the
stock price in Year 9. The dividend growth model is similar to the PVA and the PV
of a perpetuity: The equation gives you the PV one period before the first payment.
So, the price of the stock in Year 9 will be:
P
9
= D
10
/ (
R
–
g
) = $10.00 / (.14 – .05) = $111.11
The price of the stock today is simply the PV of the stock price in the future. We
simply discount the future stock price at the required return. The price of the stock
today will be:
P
0
= $111.11 / 1.14
9
= $34.17
12.
The price of a stock is the PV of the future dividends. This stock is paying four
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 Summer '10
 Mosley
 Finance, Stock Valuation, Valuation, Dividend, Gordon model

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