{[ promptMessage ]}

Bookmark it

{[ promptMessage ]}

59533341-FM11-Ch-07-Instructors-Manual-1

05 370 5280 012 005 007 rs g n rs g n this

Info icon This preview shows page 1. Sign up to view the full content.

View Full Document Right Arrow Icon
This is the end of the preview. Sign up to access the rest of the document.

Unformatted text preview: rs  g n This is the price of the stock 5 years from now. The PV of this price, discounted back 5 years, is as follows: Ö PV of P5 = $52.80(PVIF12%,5) = $52.80(0.5674) = $29.96. Step 3 The price of the stock today is as follows: Ö P0 Ö = PV dividends Years 1 through 5 + PV of P5 = $9.46 + $29.96 = $39.42. This problem could also be solved by substituting the proper values into the following equation: Answers and Solutions: 7 - 11 Ö P0 = 5 § t !1 t 0 (1  g s )  ¨ 6 © ©r g t (1  rs ) n ªs 5 ¸¨ 1 ¸ ¹© ¹ ¹ ©1 r ¹ . sº ºª Calculator solution: Input 0, 2.01, 2.31, 2.66, 3.06, 56.32 (3.52 + 52.80) into the cash flow register, input I = 12, PV = ? PV = $39.43. c. First Year D1/P0 = $2.01/$39.42 Capital gains yield Expected total return = 5.10% = 6.90% = 12.00% Sixth Year D6/P5 = $3.70/$52.80 Capital gains yield Expected total return = 7.00% = 5.00 = 12.00% *We know that r is 12 percent, and the dividend yield is 5.10 percent; therefore, the capital gains yield must be 6.90 percent. The main points to note here are as follows: 1. The total yield is always 12 percent (except for rounding errors). 2. The capital gains yield starts relatively high, then declines as the supernormal growth period approaches its end. The dividend yield rises. 3. After t=5, the stock will grow at a 5 percent rate. The dividend yield will equal 7 percent, the capital gains yield will equal 5 percent, and the total return will be 12 percent. Answers and Solutions: 7 - 12 a. Part 1. Graphical representation of the problem: Supernormal growth 1 0 | 2 | D0 PVD1 PVD2 PV P0 | Ö (D2 + P2 ) D1 Normal growth 3 | ’ | D3 D’ ¤ ¥ 2 D1 = D0(1 + gs) = $1.6(1.20) = $1.92. D2 = D0(1 + gs)2 = $1.60(1.20)2 = $2.304. Ö P2 = Ö P0 D3 = rs  g n 2 (1  g n ) rs  g n $2.304 (1 .06) = $61.06. 0.10  0.06 = Ö = PV(D1) + PV(D2) + PV( P ) Ö P2 D1 D2 =   (1  rs ) (1  rs ) 2 (1  rs ) 2 = $1.92(0.9091) + $2.304(0.8264) + $61.06(0.8264) = $54.11. ¦ 7-18 Calculator solution: Input 0, 1.92, 63.364(2....
View Full Document

{[ snackBarMessage ]}

What students are saying

  • Left Quote Icon

    As a current student on this bumpy collegiate pathway, I stumbled upon Course Hero, where I can find study resources for nearly all my courses, get online help from tutors 24/7, and even share my old projects, papers, and lecture notes with other students.

    Student Picture

    Kiran Temple University Fox School of Business ‘17, Course Hero Intern

  • Left Quote Icon

    I cannot even describe how much Course Hero helped me this summer. It’s truly become something I can always rely on and help me. In the end, I was not only able to survive summer classes, but I was able to thrive thanks to Course Hero.

    Student Picture

    Dana University of Pennsylvania ‘17, Course Hero Intern

  • Left Quote Icon

    The ability to access any university’s resources through Course Hero proved invaluable in my case. I was behind on Tulane coursework and actually used UCLA’s materials to help me move forward and get everything together on time.

    Student Picture

    Jill Tulane University ‘16, Course Hero Intern