Solutions to Lab Problems for Chapter 07

Solutions to Lab Problems for Chapter 07 - Solutions to...

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Unformatted text preview: Solutions to Lab Problems for Chapter 7 29. Sections: 7.1 Equity Securities, 7.2 Preferred Share Valuation, and 7.3 Common Share Valuation: The Dividend Discount Model (DDM) Learning Objectives: 7.1 to 7.3 Level of difficulty: Difficult a. No growth g = 0, D0 = $2, kc = 10% D18 = D0 = $2 b. Growth: 36. Section: 7.3 Common Share Valuation: The Dividend Discount Model (DDM) Learning Objective: 7.3 Level of difficulty: Medium a. The expected dividend at the end of year 5 is $5.00 (expect no growth during this period) b. The expected dividend at the end of year 6 c. The expected price of the stock at the end of year 5 (immediately after the year 5 dividend) d. The price of the stock today 1 We must take into account the present values of the dividends during the first 5 years plus the present value of the stock price in year 5. Note: the first 5 payments are an annuity so we can use the TVM function on the BAII+ calculator. N=5, PMT = 5.0, FV=$63.75, I/Y = 10%, compute PV. The price of the stock today is: $58.54 45. Section: 7.3 Common Share Valuation: The Dividend Discount Model (DDM) Learning Objective: 7.3 Level of difficulty: Medium a. Current share price of ABC: b. Current share price of XYZ: c. PVGO of ABC: d. PVGO of XYZ: 2 ...
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