1 / 15

Additional Problems with Answers Problem 1

Additional Problems with Answers Problem 1. Pricing constant growth stock, with finite horizon : The Crescent Corporation just paid a dividend of $2.00 per share and is expected to continue paying the same amount each year for the next 4 years.

linus
Télécharger la présentation

Additional Problems with Answers Problem 1

An Image/Link below is provided (as is) to download presentation Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author. Content is provided to you AS IS for your information and personal use only. Download presentation by click this link. While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server. During download, if you can't get a presentation, the file might be deleted by the publisher.

E N D

Presentation Transcript

  1. Additional Problems with AnswersProblem 1 Pricing constant growth stock, with finite horizon:The Crescent Corporation just paid a dividend of $2.00 per share and is expected to continue paying the same amount each year for the next 4 years. If you have a required rate of return of 13%, plan to hold the stock for 4 years, and are confident that it will sell for $30 at the end of 4 years, How much should you offer to buy it at today?

  2. Additional Problems with AnswersProblem 1 (Answer) In this case, we have an annuity of $2 for 4 periods, followed by a lump sum of $30, to be discounted at 13% for the respective number of years.  Using a financial calculator   Mode: P/Y=1; C/Y = 1 Input: N I/Y PV PMT FV Key: 4 13 ? 2 30 Output -24.35

  3. Additional Problems with AnswersProblem 2 Constant growth rate, infinite horizon (with growth rate estimated from past history: Using the historical dividend information provided below to calculate the constant growth rate, and a required rate of return of 18%, estimate the price of Nigel Enterprises’ common stock.

  4. Additional Problems with AnswersProblem 2 (Answer) g = [(1.30/0.35)1/9 – 1]  15.7% First, estimate the historical average growth rate of dividends by using the following equation: g = [(FV/PV)1/n – 1] Where FV = Div2008 = $1.30 PV = Div1999 = $0.35 n = number of years in between =9

  5. Additional Problems with AnswersProblem 2 (Answer) (continued) Next, use the constant growth, infinite horizon model to calculate price: i.e. Price0 = Div1/(r-g) = Div0(1+g)/(r-g) Div0 = Div2008= $1.30; Div1= Div0*(1+g) =$1.30*(1.157)$1.504; r = 18%; g = 15.7% (as calculated above) Price0 = $1.504/(.18-.157) Price0 = $65.40

  6. Additional Problems with AnswersProblem 3 Pricing common stock with multiple dividend patterns: The Wonder Products Company is expanding fast and therefore will not pay any dividends for the next 3 years. After that, starting at the end of year 4, it will pay a dividend of $0.75 per share to its common shareholders and increase it by 12% each year until it pays $1.50 at the end of year 10. After that it will pay $1.50 per year forever. If an investor wants to earn 15% per year on this investment, how much should he pay for the stock?

  7. Additional Problems with AnswersProblem 3 (Answer) First lay out the dividends on a time line. Expected Dividend Stream of The Wonder Products Co. T0 T1 T2 T3 T4 T5 T6 T7 T8 T9 T10 … T ∞ --- $0.00 $0.00 $0.00 $0.75 $0.84 $0.94 $1.05 $1.18 $1.32 $1.50 …$1.50 Note: There are 3 distinct dividend payment patterns Years 1-3, no dividends; Years 4-10, dividends grow at 12%; Years 11 onwards, zero-growth in dividends.

  8. Additional Problems with AnswersProblem 3 (Answer) (continued) Next, Calculate the price at the end of Year 10, i.e. when the dividend growth rate is zero. Price10 = Div11/r = 1.50/.15 = $10; Using the NPV function and the annual cash flows calculate the price; NPV(15,0,{0.00,0.00,0.00,0.75,0.84,0.94,1.05,1.18,1.32,1.50+10.00} $5.25 Price = $5.25

  9. Additional Problems with AnswersProblem 4 Pricing non-constant growth common stock: The WedLink Corporation just paid a dividend of $1.25 to its common shareholders. It announced that it expects the dividends to grow by 25% per year for the next 3 years. Then drop to a growth rate of 16% for an additional 2 years. Finally the dividends will converge to the industry median growth rate of 8% per year. If investors are expecting 12% per year on WedLink’s stock, calculate the current stock price.

  10. Additional Problems with AnswersProblem 4 (Answer) Determine the dividend per share in Years 1-5 using the stated annual growth rates: D1=$1.25*(1.25)=$1.56; D2=$1.56*(1.25)=$1.95; D3=1.95*(1.25)=$2.44; D4=$2.44*(1.16)=$2.83; D5=$2.83*(1.16)=3.28 Next, Calculate the price at the end of Year 5; using the Gordon Model.

  11. Additional Problems with AnswersProblem 4 (Answer) (continued) Using r = 12% and g = 8% (constant growth phase)   i.e. P5 = D5(1+g)/(r – g) P5 = $3.28*(1.08)/(.12-.08) 3.54/.04=$88.56  Finally calculate the present value of all the dividends in Years 1-5 and the price in Year 5, by using the NPV function….(TI-83 keystrokes shown here)  NPV(12,0,{1.56, 1.95, 2.44, 2.83, 3.28+88.56} = $58.60

  12. Additional Problems with AnswersProblem 5 (A) Pricing common stock with constant growth and finite life versus infinite life.   The ANZAC Corporation plans to be in business for 30 years. They announce that they will pay a dividend of $3.00 per share at the end of one year, and continue increasing the annual dividend by 4% per year until they liquidate the company at the end of 30 years. If you want to earn a rate of return of 12% by investing in their stock, how much should you pay for the stock?

  13. Additional Problems with AnswersProblem 5 (A) (Answer) Div1 = $3.00; r = 12%; g = 4%; n = 30   Using the formula for a growing annuity we can solve for the current price. Price0 = $37.5*0.89174 = $33.44

  14. Additional Problems with AnswersProblem 5 (B) If the company was to announce that it would continue increasing the dividend at 4% per year forever, how much more would you be willing to pay for its stock, assuming your required rate of return is still 12%?

  15. Additional Problems with AnswersProblem 5 (B) (Answer) If the growth rate is 4% forever, the price of the stock can be figured out by using the Gordon Model; D1=$3.00; r=12%  $3.00/(.12 - .04) $37.50

More Related