Nhw10a - 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

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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))/( .0725-0)= 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= 46.153846-40= 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.

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Nhw10a - 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

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