# Ch7.Answers - .13 – 2.94/32.84 =.0405 10 t 1 2 3 4 5 6...

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Chapter 7 Answers 1. Div./ RR = PV 5/.14 = 35.71 2. (100 x .15)/.12 = 125 3.Div./ PV = RR 2.25/36.85 = .061 4. a. 2.90/45 = .064 b. Given a required rate of return of 6 percent, the value of the stock is \$48.33 but is currently selling for \$45. Therefore, I would buy more shares. 5. (End price – Beg. Price + Dividend)/Beg. Price = return (X – 55 + 3)/55 = .15 X= 60.25 The stock must increase by 5.25 (60.25 – 55) to satisfy a required rate of return of 15 percent. 6. a. RR= Div/PV + GR (1.75/36.68) + .06 = .1077 b. 1.75/(.15 - .06) = 19.44 You should not purchase the stock because given a 15 percent required rate of return, the stock is worth 19.44 but sells for 36.68 in the market. 7. PV= Div/(RR- GR) Step 1: Find the next expected dividend. 2.75 x 1.08 = 2.97 Step 2: Solve for the PV of the stock. 2.97/(.14 - .08) = 49.50 8. a. RR= Div/PV + GR Step 1: Calculate the next expected dividend 1.95 x 1.05 = 2.05 Step 2: Solve for the required rate of return (2.05/25.45) + .05 = .1306 b. \$34.13 c. Yes

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9. GR= RR – Div/PV
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Unformatted text preview: .13 – 2.94/32.84 = .0405 10. t 1 2 3 4 5 6 \$2.50 \$2.90 \$3.36 \$3.90 \$4.53 \$4.84 \$5.18 PV \$2.46 \$2.42 \$2.38 \$2.33 PV_1-4 \$9.58 TV \$44.03 PVTV \$22.71 Price \$32.29 Note, the Terminal Value (TV) is computed with the Gordon Model as: (4.53*1.07)/ (.18-.07) = 44.06 if you use a financial calculator and you round to the nearest penny on each annual amount. In the spreadsheet above, we have 44.03 because the spreadsheet does not round when it calculates. So, if you work this problem without rounding in your calculator, you will get the answer we have above. You then discount this value back four years at 18% and you get the present value of the terminal value (PVTV) of 22.71. Then add the present value from years 1-4 (PV_1-4) of 9.58 to the PVTV of 22.71 and you get the solution of 32.29. Of course, if you round to the nearest penny, you’ll get a slightly different answer. TV will be 44.06. PVTV will be 22.73 and the final price will be 32.31....
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