3331 ch 9 sol

3331 ch 9 sol - Solutions to End-of-Chapter Problems 9-1 D...

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Unformatted text preview: Solutions to End-of-Chapter Problems 9-1 D = $1.50; g 1-3 = 7%; g n = 5%; D 1 through D 5 = ? D 1 = D (1 + g 1 ) = $1.50(1.07) = $1.6050. D 2 = D (1 + g 1 )(1 + g 2 ) = $1.50(1.07) 2 = $1.7174. D 3 = D (1 + g 1 )(1 + g 2 )(1 + g 3 ) = $1.50(1.07) 3 = $1.8376. D 4 = D (1 + g 1 )(1 + g 2 )(1 + g 3 )(1 + g n ) = $1.50(1.07) 3 (1.05) = $1.9294. D 5 = D (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%; P = ? . 25 . 6 $ 07 . 15 . 50 . $ g r D P s 1 =- =- = 9-3 P = $20; D = $1.00; g = 6%; 1 P = ?; r s = ? 1 P = P (1 + g) = $20(1.06) = $21.20. s r = 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. 1 2 3 | | | | 1.25 1.50 1.80 1.89 Chapter 9: Stocks and Their Valuation Answers and Solutions 1 r s = 10% g s = 20% g s = 20% g n = 5% 37.80 = 05 . 10 . 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 . 10 . ) 05 . 1 ( 80 . 1 $ =- c. The firms 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, 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 firms 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....
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This note was uploaded on 04/01/2012 for the course FIN 3331 taught by Professor Nowacki during the Spring '09 term at Troy.

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3331 ch 9 sol - Solutions to End-of-Chapter Problems 9-1 D...

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