ch07 Expansion Incorporated Demo Problem

ch07 Expansion Incorporated Demo Problem - 2011 Dr. William...

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Chapter 7 Equity Valuation Non-Normal Growth: 3 Steps to Finding P0 1. Find the PV of the dividends during the non-normal growth period or periods. 2a. Find the value of the C/S at the beginning of the normal growth period. 2b. Discount answer 2a to the present. 3. Sum steps 1 and 2b to find P0. 1 © 2011 Dr. William F. Rentz & Associates
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Example: Expansion Incorporated The firm Expansion Inc. (EI) expects to pay dividends of $10.00 per share for 2011. Thereafter, dividends are expected to increase by 20% per annum for the years 2012 through 2017. Dividends are expected to REMAIN at the 2017 level for the years 2018 through 2021. © 2011 Dr. William F. 2
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Example: Expansion Incorporated Thereafter, dividends will INCREASE at a compound rate of 6% per year from the 2021 level for the foreseeable future. Shareholders of EI require a 16% rate of return. © 2011 Dr. William F. 3
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Example: expansion incorporated REQUIRED: Estimate the price for EI at the BEGINNING of the year 2011. To do this, we will use the three-step approach outlined previously in Slide #1. © 2011 Dr. William F. 4
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Example: expansion incorporated STEP 1 Calculate the dividends D1 through D11 (i.e. the dividends for 2011 through 2021) and then find the PV of these dividends © 2011 Dr. William F. 5
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D1 = $10 D2 = $10(1.20)1 = $12.00 D3 = $10(1.20)2 = $14.40 D4 = $10(1.20)3 = $17.28 D5 = $10(1.20)4 = $20.74 D6 = $10(1.20)5 = $24.88 D7 = $10(1.20)6 = $29.86 D7 = D8 = D9 = D10 = D11 = $29.86 © 2011 Dr. William F.
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This note was uploaded on 03/12/2012 for the course TELFER ADM2350 taught by Professor Rentz during the Winter '12 term at University of Ottawa.

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ch07 Expansion Incorporated Demo Problem - 2011 Dr. William...

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