s Tables SmartArt Review Normal No SpacingHeading 1Heading 2Tde Review problems-
ID: 2806701 • Letter: S
Question
s Tables SmartArt Review Normal No SpacingHeading 1Heading 2Tde Review problems-final Problem #1 What constant growth rate in dividends is expected for a stock valued at $32.00 if next year's dividend is forecast at $2.00 and the appropriate discount rate (i.e. investor's required return) is 13%? Problem #2 A company just pulled off the turn-around of the century. It was recently nearly bankrupt, but today, it announced a S1 dividend to be paid one year from now. It is also expected that the dividend will increase by S1 per year for the following two years. After the third year (when the dividend is S3), dividend growth is expected to slow to 6 percent. If the firm's investors expect a 14 percent return on this stock, what is the val Problem #3 A company projects a rate of return on new investment of 20 percent. Management planis to plowback 30 percent of all earnings into the firm. Earnings this year will be $3 per share and stock. investors expect a 12 percent return on the What is the growth rate on the stock? What is the stock price? What is the value of the company that pays out all of its earnings as a dividend? What is the P/E ratio? What would the price and P/E ratio of the firm be if it paid out all earnings as a dividend? a) b) e) d) e) Problem #4 A company has 800, 9% coupon bonds, with a face value of $1,000, are outstanding with 25 years to maturity, and a current price of $1,080. The bonds pay interest annually. The company also has 20,000 80 F7 FSExplanation / Answer
Question No.1
Calculation of Growth Rate
Po= D1/Ke-g
Where, Po= Stock Price, Ke= Cost of Equity , g=growth.
32=2/0.13-g
4.16-32g=2
growth = 0.0675 or 6.75%
Question No.2
Share Value = $ 31.28
Notes
Share Value = D3(1+g)/ke-g
=3(1.06)/0.14-0.06
=39.75
Question No.3
Growth = Retention * Rate of return(br)
=0.30*0.20
=0.06 or 6%
Stock Price =E(1-b)/ke-br
Where, E= EPS,(1-b) = Payout Ration, P = Retention Ratio,Ke = Cost of Equity, br= growth
=3(1-0.30)/0.12-0.06
= $ 35.00
Stock Price if 100% Payout Ratio
=3/0.12-0.06(Same Formula)
= $ 50.00
Calculaiton of PE Ratio
PE Ratio = Price Per Share /EPS
=35/3
=11.67 times
PE Ratio if 100% Pay out = 50/3
=16.67 times
Question No.4
YTM = Interest + Amortisation/Average Price of bond
=90+(1080-1000/25)/(1000+1080/2)
=93.20/1040
=0.0896 or 8.96%
Particulars Year Cashflow PVF @ 14% DCF Dividend 1 1 0.8772 0.88 Dividend 2 2 0.7695 1.54 Dividend 3 3 0.6750 2.03 Share Price(Notes) 3 39.75 0.6750 26.83 Share Value 31.28Related Questions
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