Unit3(1) - value of stock A: 100 Here it is assumed that...

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ytm 4% Period Coupon RaCF PV 1 6% 60 58 2 6% 60 55 3 6% 60 53 4 6% 60 51 5 6% 1060 871 European Government 1,089.04 Value of the Bond Period Coupon RaCF PV 1 3% 30 29 2 3% 30 29 3 3% 30 28 4 3% 30 28 5 3% 30 27 6 3% 30 27 7 3% 30 26 8 3% 30 26 9 3% 30 25 10 3% 1030 845 US Treasury 1,089.83 Value of the Bond
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value of the stock= dividend declared next year/return on equity- growth rate thus : 73= 1.68/r-0.085 therefore r= 0.11 return on equity = 10.80% Expected growth rate in EPS : g= Return on equity*Retention ratio therefore g= 0.12*(1-0.5) g=0.06 g= 6% The company retains half the profit for further growth and distributes the remaining half as divide At Market capitalization of 10% For stock A : the price is the present value of all the dividends received in perpetuity
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Unformatted text preview: value of stock A: 100 Here it is assumed that the first dividend is received in one year from now Value of stock B = dividend declaed next year/ r - g Value of stock B: 83.33 Value of stock C is the present value of the dividends for the next 5 years assuming dividends g Value of stock C: 27.25 Stock A is the most valuable At Market capitalization of 7% value of stock A: 142.86 value of stock B: 166.67 Value of stock C: 29.77 Stock B is the most valuable end. That's why the growth rate is half the ROE. row at 20%)...
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This note was uploaded on 07/06/2011 for the course MM 305 taught by Professor Fulton during the Fall '09 term at Kaplan University.

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Unit3(1) - value of stock A: 100 Here it is assumed that...

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