FIN302: Chp 9 HW SOLUTIONS
FIN302: Chp 9 HW SOLUTIONS FIN302
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Date Created: 11/03/15
Giulia Dias Roncoletta FN302 November 3 2015 Chapter 9 Homework Solutions Notes 1 Stock Valuation L01 Why does the value of a of stock depend on dividends 2 Stock Valuation L01 A substantial percentage of the companies listed on the NYSE and NASDAQ don39t pay dividends but investors are nonetheless willing to buy shares in them How is this possible given your answer to the previous question 1 Stock ValuationLO1 Dividends are cash flows paid from the profitrevenue to the shareholders usually at the end of the period The price of the stock today is equal to the present value of all the future dividends 2 Stock ValuationLO1 Because certain companies aren t paying dividends it means that they currently aren t paying but eventually have or will 7 Growth Rate L01 In the context of the dividend growth model is it true that the growth rate in dividends and the growth rate in the price of the stock are identical 7 Growth RateLO1 Both rates are directly related therefore if the discount rate goes up the dividend rate goes up And vice versa 1 Stock Values L01 The Jackson Timberlake Wardrobe Co just paid a dividend of SI 45 per share on its stock The dividends are expected to grow at a constant rate of 6 percent per year inde nitely lf investors require a return of l l percent on The Jackson Timberlake Wardrobe Co stock what is the current price What will the price he in three years In 15 years 2 Stock Values L01 The next dividend payment by Blue Cheese Inc will be 189 per share The dividends are anticipated to maintain a growth rate of 5 percent forever If the stock currently sells for 38 per share what is the required return 1Stock ValuesLO1 The constant dividend growth model is Pt Dt x1gR g So the price of the stock today is PO D01gR g145106011 0063074 The dividend at Year 4 is the dividend today times the FVIF tor the growth rate in dividends and four years so 4 4 P3 D31gR gD01g R g145106 O11 0063661 We can do the same thing to find the dividend in Year 16 which gives us the price in Year 15 so P15 D151gR gDo1g16R g14510616O11 O067367 There is another feature of the constant dividend growth model The stock price grows at the dividend growth rate 80 if we know the stock price today we can find the future value for any time in the future we want to calculate the stock price In this problem we want to know the stock price in three years and we have already calculated the stock price today The stock price in three years will be P3 Po1 g3 30741 0063 3661 And the stock price in 15 years will be P15 Po1 g15 30741 00615 7367 2 Stock ValuesLO1 We need to find the required return of the stock Using the constant growth model we can solve the equation for R Doing so we find RD1 Pog189380000500997or 997 7 Stock Valuation L01 Apocalyptica Corp pays a constant 850 dividend on its stock 39lhe company will maintain this dividend for the next I I years and will then cease paying dividends forever If the required return on this stock is 12 percent what is the current share price 8 Valuing Preferred Stock L01 Lane Inc has an issue of preferred stock out standing that pays a 475 dividend everr year in perpetuity If this issue currently sells for 93 per share what is the required retum39 7 Stock ValuationLO1 CONFUSED DO WE GET PVIFA TABLE ON TEST ASK PETERSON The price of any financial instrument is the PV of the future cash flows The future dividends of this stock are an annuity for 11 years so the price of the stock is the PVA which will be P0 850PVFA1211 5047 8 Valuing Preferred StockLO1 The price of a share of preferred stock is the dividend divided by the required return This is the same equation as the constant growth model with a dividend growth rate of zero percent Remember most preferred stock pays a fixed dividend so the growth rate is zero Using this equation we find the price per share of the preferred stock is R DPo 47593 00511 or 511 15 Nonconstant Growth L01 Metallica Bearings lnc is a young startup company No dividends will be paid on the stock over the next nine years because the firm needs to plow back its earnings to fuel growth The company will pay a 12 per share dividend in 10 years and will increase the dividend by 5 percent per year thereafter If the required return on this stock is 135 percent what is the current share price 15 Nonconstant GrowthLO1 Here we have a stock that pays no dividends for 10 years Once the stock begins paying dividends it will have a constant growth rate of dividends We can use the constant growth model at that point It is important to remember that general constant dividend growth formula is Pt Dt gtlt1gRg This means that since we will use the dividend in Year 10 we will be finding the stock price in Year 9 The dividend growth model is similar to the PVA and the PV of a perpetuity The equation gives you the PV one period before the first payment 80 the price of the stock in Year 9 will be P9 D1o R g1200O135 005141 18 The price of the stock today is simply the PV of the stock price in the future We simply discount the future stock price at the required return The price of the stock today will be P0 1411811359 4516 18 Supernormal Growth L01 Janiccx o is growing quickly Dividends are expected to grow at a rate of 24 percent for the next three years with the growth rate falling OH to a constant 6 percent thereafter If the required return is l l percent and the company just paid a dividend of l90 what is the current share price 18 Supernormal GrowthLO1 With supernormal dividends we find the price of the stock when the dividends level off at a constant growth rate and then find the PV of the future stock price plus the PV of all dividends during the supernormal growth period The stock begins constant growth in Year 4 so we can find the price of the stock in Year 3 one year before the constant dividend growth begins as P3 D31gR gDo1g131g2R g P3 1901243106 011 006 P3 7680 The price of the stock today is the PV of the first three dividends plus the PV of the Year 3 stock price The price of the stock today will be 2 P0 190124111 1 90124 1112 1 901 243 1113 768O1113 P0 6330 20 Negative Growth L01 Antiques R Us is a mature manufacturing firm The com pany just paid a dividend of 940 but management expects to reduce the payout by 4 percent per year indefinitely If you require a return of IO percent on this stock what will you pay for a share today 21 Finding the Dividend L01 l eehack Corporation stock currently sells for 64 per share The market requires a return of l l percent on the firm39s stock If the company maintains a constant 45 percent growth rate in dividends what was the most recent dividend per share paid on the stock 22 Valuing Preferred Stock L01 EEyescom Bank just issued some new preferred stock The issue will pay an annual dividend of 20 in perpetuity beginning 20 years from now If the market requires a return of 58 percent on this investment how much does a share of preferred stock cost today 20 Negative GrowthLO1 The constant growth model can be applied even if the dividends are declining by a constant percentage just make sure to recognize the negative growth So the price of the stock today will be P0 D01gR g P0 9401 004 010 004 P0 6446 21 Finding the DividendLO1 We are given the stock price the dividend growth rate and the required return and are asked to find the dividend Using the constant dividend growth model we get P0 64D01gRg Solving this equation for the dividend gives us D0 64O11 0045 1045 D0 398 22 Valuing Preferred StockLO1 The price of a share of preferred stock is the dividend payment divided by the required return We know the dividend payment in Year 20 so we can find the price of the stock in Year 19 one year before the first dividend payment Doing so we get P19 2000 0058 P19 34483 The price of the stock today is the PV of the stock price in the future so the price today will be P0 34483 105819 P0 11813
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