Equity

Week-6: Solutions to HW Problems 7-3 P0 = $20; D0 = $1.00; g = 10%; = P0(1 + g) = $20(1.10) = $22. = = +g= = ?; s= ? s + 0.10 s + 0.10 = 15.50%. = 15.50%. 7-4 Dps = $5.00; Vps = $50; rps = ? rps = = = 10%. 7-5 0 | 1 | 2 | 3 | D0 = 2.00 D1 D2 D3 ill-treat 1: bet the required run of return on the stock: rs = rRF + (rM - rRF)b = 7.5% + (4%)1.2 = 12.3%. dance step 2: prefigure the pass judgment dividends: D0 = $2.00 D1 = $2.00(1.20) = $2.40 D2 = $2.00(1.20)2 = $2.88 D3 = $2.88(1.07) = $3.08 Step 3: Calculate the PV of the expected dividends: PVDiv = $2.40/(1.123) + $2.88/(1.123)2 = $2.14 + $2.28 = $4.42. Step 4: Calculate : = D3/(rs g) = $3.08/(0.123 0.07) = $58.11. Step 5: Calculate the PV of : PV = $58.11/(1.123)2 = $46.08. Step 6: Sum the PVs to obtain the stocks break throughlay: = $4.42 + $46.08 = $50.50. Alternatively, using a financial calculator, input the pursuit: CF0 = 0, CF1 = 2.40, and CF2 = 60.99 (2.88 + 58.11) and therefore enter I/YR = 12.3 to sort out for NPV = $50.50. 7-6 The problem asks you to set apart the ceaseless growth put, condition the following facts: P0 = $80, D1 = $4, and rs = 14%. utilisation the immutable growth position formula to calculate g: = +g +g s 0.14 = g = 0.09 = 9%.

7-7 The problem asks you to determine the cheer of , given(p) the following facts: D1 = $2, b = 0.9, rRF = 5.6%, RPM = 6%, and P0 = $25. keep on as follows: Step 1: Calculate the required localize of return: rs = rRF + (rM rRF)b = 5.6% + (6%)0.9 = 11%. Step 2: Use the constant growth enumerate formula to calculate g: = ! +g +g s 0.11 = g Step 3: = 0.03 = 3%. : Calculate = P0(1 + g)3 = $25(1.03)3 = $27.3182 ? $27.32. Alternatively, you could calculate D4 and then(prenominal) use the constant growth rate formula to solve for : D4 = D1(1 + g)3 = $2.00(1.03)3 = $2.1855. = $2.1855/(0.11 0.03) = $27.3188 ? $27.32. 7-8 Vps = Dps/rps; therefore, rps = Dps/Vps. a. b. c. d. rps = $8/$60 = 13.3%. rps = $8/$80 =...If you want to nurture a full essay, order it on our website: OrderCustomPaper.com

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