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Homework 10
1.
Find the value of a stock using the constant growth DDM, if the last dividend paid
is $3 and the beta=.85, market risk premium is 5%, risk free rate is 3% and the
dividend growth rate is 0, 3 or 5%?
K= .85(.05)+.03= .0725
0:
(3*(1+.0))/( .07250)= 41.3793103
3:
(3*(1+.03))/( .0725.03)= 72.7058823
5:
(3*(1+.05))/( .0725.05)= 140
2.
Next year’s expected firm earnings are $4,000, shares outstanding 1000,
ROE=14% capitalization rate 10%, b=.1% and assuming constant growth
dividends.
A.
Calculate P
0
and P
0
in a no growth case (b=0).
EPS= 4,000/1000=4
D
1
= 4(1.1)= 3.6
3.6/(.1.14*.1)= 41.860465= P
0
D
1
=E
1
= 50
4/.1= 40=P
0
(no growth case)
B.
Calculate P
0
if b=.25, use this to find the PVGO.
D
1
= 4(1.25)= 3
3/(.1.14*.25)= 46.153846= P
0
PVGO=
46.15384640= 6.153846
C.
Redo the no growth case and part B to find the PVGO if the capitalization
rate was 15%?
No growth P
0
= 4/.15= 26.66666
D
1
= 4(1.25)= 3
3/(.15.14*.25)= 26.086956= P
0
PVGO=
26.086956 26.66666=
.57971013
D. Comment on part B and part C.
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This note was uploaded on 10/15/2011 for the course ECON 171 taught by Professor Hull during the Spring '09 term at Brandeis.
 Spring '09
 Hull

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