Week 9 Tutorial Solutions

# Week 9 Tutorial Solutions - Solutions Tutorial Week 9...

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Solutions – Tutorial Week 9 Chapter 17 8. Newspaper exercise; answers will vary depending on the stocks chosen. 9. a. Distributes a relatively low proportion of current earnings to offset fluctuations in operational cash flow; lower P/E ratio. b. Distributes a relatively high proportion of current earnings since the decline is unexpected; higher P/E ratio. c. Distributes a relatively low proportion of current earnings in order to offset anticipated declines in earnings; lower P/E ratio. d. Distributes a relatively low proportion of current earnings in order to fund expected growth; higher P/E ratio. 10. a. A t = 0 each share is worth \$20. This value is based on the expected stream of dividends: \$1 at t = 1, and increasing by 5% in each subsequent year. Thus, we can find the appropriate discount rate for this company as follows: g r DIV P 1 0 - = 0.05 r 1 \$20 - = r = 0.10 = 10.0% Beginning at t = 2, each share in the company will enjoy a perpetual stream of growing dividends: \$1.05 at t = 2, and

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Week 9 Tutorial Solutions - Solutions Tutorial Week 9...

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