Chapter 9 Homework Problems Solutions

Chapter 9 Homework Problems Solutions -...

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Solutions to End-of-Chapter Problems 9-1 D 0  = $1.50; g 1-3  = 7%; g n  = 5%; D 1  through D 5  = ? D 1  = D 0 (1 + g 1 ) = $1.50(1.07) = $1.6050. D 2  = D 0 (1 + g 1 )(1 + g 2 ) = $1.50(1.07) 2  = $1.7174. D 3  = D 0 (1 + g 1 )(1 + g 2 )(1 + g 3 ) = $1.50(1.07) 3  = $1.8376. D 4  = D 0 (1 + g 1 )(1 + g 2 )(1 + g 3 )(1 + g n ) = $1.50(1.07) 3 (1.05) = $1.9294. D 5  = D 0 (1 + g 1 )(1 + g 2 )(1 + g 3 )(1 + g n ) 2  = $1.50(1.07) 3 (1.05) 2  = $2.0259. 9-2 D 1  = $0.50; g = 7%; r s  = 15%;  0 P ˆ  = ? . 25 . 6 $ 07 . 0 15 . 0 50 . 0 $ g r D P ˆ s 1 0 = - = - = 9-3 P 0  = $20; D 0  = $1.00; g = 6%;  1 P ˆ  = ?; r s  = ? 1 P ˆ  = P 0 (1 + g) = $20(1.06) = $21.20. s r ˆ 0 1 P D  + g =  20 $ ) 06 . 1 ( 00 . 1 $  + 0.06 20 $ 06 . 1 $  + 0.06 = 11.30%.  r s  = 11.30%. 9-4 a. The terminal, or horizon, date is the date when the growth rate becomes constant.  This occurs at the end of Year 2. b. 0 1 2 3 r s  = 10%
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| | | | 1.25 1.50 1.80 1.89 37.80 =  05 . 0 10 . 0 89 . 1 - The horizon, or terminal, value is the value at the horizon date of all dividends  expected thereafter.  In this problem it is calculated as follows: . 80 . 37 $ 05 . 0 10 . 0 ) 05 . 1 ( 80 . 1 $   = - c. The firm’s intrinsic value is calculated as the sum of the present value of all  dividends during the supernormal growth period plus the present value of the  terminal value.  Using your financial calculator, enter the following inputs:  CF 0  = 0,  CF 1  = 1.50, CF 2  = 1.80 + 37.80 = 39.60, I/YR = 10, and then solve for NPV =  $34.09. 9-5 The firm’s free cash flow is expected to grow at a constant rate, hence we can apply a  constant growth formula to determine the total value of the firm. Firm value = FCF 1 /(WACC – g) = $150,000,000/(0.10 – 0.05) = $3,000,000,000. To find the value of an equity claim upon the company (share of stock), we must  subtract out the market value of debt and preferred stock.  This firm happens to be  entirely equity funded, and this step is unnecessary.  Hence, to find the value of a share  of stock, we divide equity value (or in this case, firm value) by the number of shares  outstanding. Equity value per share = Equity value/Shares outstanding = $3,000,000,000/50,000,000 = $60. Each share of common stock is worth $60, according to the corporate valuation model. g s  = 20% g s  = 20% g n  = 5%
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9-6 D p  = $5.00; V p  = $60; r p  = ? r
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Chapter 9 Homework Problems Solutions -...

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