Unformatted text preview: = 7.5% + (4%)1.2 = 12.3%.
Step 2: Calculate the expected dividends:
D0 = $2.00
D1 = $2.00(1.20) = $2.40
D2 = $2.00(1.20)2 = $2.88
D3 = $2.88(1.07) = $3.08
Step 3: Calculate the PV of the expected dividends:
PVDiv = $2.40/(1.123) + $2.88/(1.123)2 = $2.14 + $2.28 = $4.42.
Ö
Step 4: Calculate P2 : Ö
P2 = D3/(rs  g) = $3.08/(0.123  0.07) = $58.11.
Ö
Step 5: Calculate the PV of P2 : PV = $58.11/(1.123)2 = $46.08.
Step 6: Sum the PVs to obtain the stock¶s price:
Ö
P0 = $4.42 + $46.08 = $50.50.
Alternatively, using a financial calculator, input the following:
CF0 = 0, CF1 = 2.40, and CF2 = 60.99 (2.88 + 58.11) and then enter I = 12.3 to solve for
NPV = $50.50. Answers and Solutions: 7  5 76 The problem asks you to determine the constant growth rate, given the following facts:
P0 = $80, D1 = $4, and rs = 14%. Use the constant growth rate formula to calculate g:
rs= 1 +g 0 $4
+g
$80
g = 0.09 = 9%. 0.14 = 77 Ö
The problem asks you to determine the value of P3 , given the following facts: D1 = $2, b
= 0.9, rRF = 5.6%, RPM = 6%, and P0 = $25. Proceed as follows:
Step 1: Calculate the required rate of return:
rs = rRF + (rM  rRF)b = 5.6% + (6%)0.9 = 11%. Step 2: Use the constant growth rate formula to calculate g:
rs 1 = +g 0 $2
+g
$25
= 0.03 = 3%. 0.11 =
g
Step 3: Calculate Ö 3 :
Ö3 = 0(1 + g)3 = $25(1.03)3 = $27.3182 § $27.32. Alternatively, you could calculate
solve for Ö 3 : 4 and then use the constant growth rate formula to = 1(1 + g)3 = $2.00(1.03)3 = $2.1855.
Ö 3 = $2.1855/(0.11  0.03) = $27.3188 } $27.32.
4 Answers and Solutions: 7  6 78 Vps = Dps/rps; therefore, rps = Dps/Vps.
a. rps = $8/$60 = 13.3%.
b. rps = $8/$80 = 10%.
c. rps = $8/$100 = 8%.
d. rps = $8/$140 = 5.7%.
D 0 (1 g)
$5[1 ( 0.05)]
$5( 0.95)
$4.75
=
=
=
= $23.75.
rs g
0.15 ( 0.05)]
0.15 0.05
0 .20 79 Ö
P0 = 710 a. ri = rRF + (rM  rRF)bi.
rC = 9% + (13%  9%)0.4 = 10.6%. rD = 9% + (13%  9%)0.5 = 7%. 1 rs g = Note that rD is below the riskfree rate. But since this stock is like an insurance policy
because it ³pays off´ when something bad happens (the market falls), the low return
is not unreasona...
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 Spring '12
 jamnadas
 Valuation, Dividend yield

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