FIN 515 Homework Week 4 After cost debt and valuation chapter 7 and 9
FI515
Week 4 Homework
P7-2
Chapter 7
Constant Growth Valuation
7–2)
Dividend Expected
Growth Rate
Required ROR stock (rs)
1.50/(.07-.15)=
Stock price
Price = Dividend / (Required Return - Growth Rate)
P7-4
$1.50
7%
15%
Constant Growth Valuation
Boehm Incorporated is expected to pay a $1.50 per share dividend at the end of this year (i.e., D1 = $1.50). The dividend is expected to grow at a constant rate of 7% a year. The required rate of return on the stock, rs, is 15%.
What is the value per share of Boehm’s stock?
$18.75
Preferred Stock Valuation
(7–4)
Dividend
Price of Stock
Required Return
P7-5
$5.00
Zero Growth Stock Price = Dividend / Required Return
$50
Nick’s Enchiladas Incorporated has preferred stock outstanding that pays a dividend of $5 at the end of each year. The preferred sells for $50 a share. What is the stock’s required rate of return?
10% Required Return = Dividend / Price
(7–5)
Nonconstant Growth Valuation
Nonconstant Growth Valuation
Step 1: Calculate the required rate of return using CAPM
A company currently pays a dividend of $2 per share (D0 =
$2). It is estimated that the company’s dividend will grow at a rate of 20% per year for the next 2 years, then at a constant rate of 7% thereafter. The company’s stock has a beta of 1.2, the risk-free rate is 7.5%, and the market risk premium is 4%. What is your estimate of the stock’s current price?
Required Rate of Return = rs = Risk Free Rate + (Market Risk Premium)*Beta beta 1.2
Risk-free rate
7.50%
Market Risk Premium
4.00%
Required ROR
Preferred Stock Valuation
12.3%
Step 2: Calculalte the expected dividends by using the future value function and growth rate
D0
2.00
D1
2.40 D0*(1+Growth Rate)
20% Growth
D2
2.88 D1*(1+Growth Rate)
20% Growth
D3
3.08 D2*(1+Growth Rate)
7% Growth
Step 3: Calculate the horizon value of D3
3.08/0.12-0.07=61.6
Horizon Value = D3 / (required
Week 4 Homework
P7-2
Chapter 7
Constant Growth Valuation
7–2)
Dividend Expected
Growth Rate
Required ROR stock (rs)
1.50/(.07-.15)=
Stock price
Price = Dividend / (Required Return - Growth Rate)
P7-4
$1.50
7%
15%
Constant Growth Valuation
Boehm Incorporated is expected to pay a $1.50 per share dividend at the end of this year (i.e., D1 = $1.50). The dividend is expected to grow at a constant rate of 7% a year. The required rate of return on the stock, rs, is 15%.
What is the value per share of Boehm’s stock?
$18.75
Preferred Stock Valuation
(7–4)
Dividend
Price of Stock
Required Return
P7-5
$5.00
Zero Growth Stock Price = Dividend / Required Return
$50
Nick’s Enchiladas Incorporated has preferred stock outstanding that pays a dividend of $5 at the end of each year. The preferred sells for $50 a share. What is the stock’s required rate of return?
10% Required Return = Dividend / Price
(7–5)
Nonconstant Growth Valuation
Nonconstant Growth Valuation
Step 1: Calculate the required rate of return using CAPM
A company currently pays a dividend of $2 per share (D0 =
$2). It is estimated that the company’s dividend will grow at a rate of 20% per year for the next 2 years, then at a constant rate of 7% thereafter. The company’s stock has a beta of 1.2, the risk-free rate is 7.5%, and the market risk premium is 4%. What is your estimate of the stock’s current price?
Required Rate of Return = rs = Risk Free Rate + (Market Risk Premium)*Beta beta 1.2
Risk-free rate
7.50%
Market Risk Premium
4.00%
Required ROR
Preferred Stock Valuation
12.3%
Step 2: Calculalte the expected dividends by using the future value function and growth rate
D0
2.00
D1
2.40 D0*(1+Growth Rate)
20% Growth
D2
2.88 D1*(1+Growth Rate)
20% Growth
D3
3.08 D2*(1+Growth Rate)
7% Growth
Step 3: Calculate the horizon value of D3
3.08/0.12-0.07=61.6
Horizon Value = D3 / (required