# 12 p0 k s g 013006 212 007 3029

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Unformatted text preview: e expected to grow forever at a constant rate, g. D1 = D0 (1+g)1 D2 = D0 (1+g)2 Dt = D0 (1+g)t Scenario 2: Constant growth of Scenario 2: Constant growth of dividend (cont.) Dividends are expected to grow at a constant percent per period. P0 = D1 /(Ks) + D2 /(Ks)2 + D3 /(Ks)3 + … P0 = D0(1+g)/(Ks) + D0(1+g)2/(Ks)2 + D0(1+g)3/ (Ks)3 + … With a little algebra and some series work, this reduces to: D 0 (1 + g) D1 P0 = = Ks - g Ks - g If kRF = 7%, kM = 12%, and β = 1.2, what If k is the required rate of return on the firm’s stock? Use the SML to calculate the required rate of return (ks): ks = kRF + (kM – kRF)β = 7% + (12% ­ 7%)1.2 = 13% If D0 = \$2 and g is a constant 6%, find If D the expected dividend stream for the next 3 years, and their PVs. 0 g = 6% D0 = 2.00 1.8761 1.7599 1.6509 1 2 2.12 2.247 ks = 13% 3 2.382 What is the stock’s market value? What is the stock’s market value? Using the constant growth model: D1 \$2.12 P0 = = k s ­ g 0.13 ­ 0.06 \$2.12 = 0.07 = \$30.29...
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