Unformatted text preview: ulator solution: Input 0, 0, 0, and 34.73 into the cash flow register, I = 12, PV =
? PV = $24.72.
d. $24.72 + $5.29 = $30.01 = Maximum price you should pay for the stock.
£ D (1 g)
$2.10
1
Ö
e. P0 = 0
=
=
= $30.00.
rs g
0.12 0.05
rs g
f. The value of the stock is not dependent upon the holding period. The value
calculated in Parts a through d is the value for a 3year holding period. It is equal to
the value calculated in Part e except for a small rounding error. Any other holding
Ö
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period would produce the same value of P0 ; that is, P0 = $30.00.
715 a. g = $1.1449/$1.07  1.0 = 7%.
Calculator solution:
I = ? I = 7.00%. Input N = 1, PV = 1.07, PMT = 0, FV = 1.1449, b. $1.07/$21.40 = 5%.
c. r s= D1/P0 + g = $1.07/$21.40 + 7% = 5% + 7% = 12%. Answers and Solutions: 7  9 716 $2 (1 0.05)
$1.90
Ö
a. 1. P0 =
=
$9.50.
0.15 0.05
0.20 Ö
2. P0 = $2/0.15 = $13.33.
$2 (1.05)
$2.10
Ö
=
= $21.00.
3. P0 =
0.15 0.05
0.10
$2 (1.10)
$2.20
Ö
4. P0 =
=
= $44.00.
0.15 0.10
0.05 Ö
b. 1. P0 = $2.30/0 = Undefined.
Ö
2. P0 = $2.40/(0.05) = $48, which is nonsense.
These results show that the formula does not make sense if the required rate of return
is equal to or less than the expected growth rate.
c. No. Answers and Solutions: 7  10 717 a. End of Year: 0 1  r = 12%  2 3 4 5 6      g = 15%
D0 = 1.75 g = 5%
D1 D2 D3 D4 D5 D6 = D0(1 + g)t
= $1.75(1.15)1 = $2.01.
= $1.75(1.15)2 = $1.75(1.3225) = $2.31.
= $1.75(1.15)3 = $1.75(1.5209) = $2.66.
= $1.75(1.15)4 = $1.75(1.7490) = $3.06.
= $1.75(1.15)5 = $1.75(2.0114) = $3.52. Dt
D1
D2
D3
D4
D5 b. Step 1
5 § Dt .
(1 rs ) t
t !1
PV D1 = $2.01(PVIF12%,1) = $2.01(0.8929) = $1.79
PV D2 = $2.31(PVIF12%,2) = $2.31(0.7972) = $1.84
PV D3 = $2.66(PVIF12%,3) = $2.66(0.7118) = $1.89
PV D4 = $3.06(PVIF12%,4) = $3.06(0.6355) = $1.94
PV D5 = $3.52(PVIF12%,5) = $3.52(0.5674) = $2.00
PV of dividends = $9.46
PV of dividends = Step 2
Ö
P5 ! D 5 (1 g n )
D6
$3.52 (1.05)
$3.70
!
=
=
= $52.80.
0.12 0.05
0.07
rs g n...
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 Spring '12
 jamnadas
 Valuation, Dividend yield

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