Financial Management Mini Case P302 Question I to Q

i) P0 = D1 (PVIF t=1, r=13%) + D2 (PVIF t=2, r=13%) + D3 (PVIF t=3, r=13%) +

P4 (PVIF t=4,r=13%)

= 2/1.13 + 2/(1.13^2) + 2/ (1.13^3) + [D5/ (r-g)]/(1.13^4)

= 1.77+1.57+1.39+[2x(1.06^2)/(13%-6%)]/(1.13^4)

= 4.73+19.71

= 24.44

Year 1, Expected Dividend Yield = 2/24.44 = 8.18%

Capital Gain Yield = (P1-P0)/P0

P1 = D2 (PVIF t=1, r=13%) + D3 (PVIF t=2, r=13%) + P4 (PVIF t=3,

r=13%)

= 1.77+1.57+22.27 = 25.61

Capital Gain Yield = (25.61 – 24.44) / 24.44 = 4.79%

Year 4, Expected Dividend Yield = 2.25/32.14 = 7%

Capital Gain Yield = Growth Rate = 6%

j) P0 = D1 / (r-g) = 1.88/ [13%-(-6%)) = 9.89; It has value of $9.89, so people will still want to buy it.

Assume in year T, Expected Dividend Yield = D(t+1)/Pt = r – g = 19%

Capital Gain Yield = Growth Rate = -6%

k) Market Multiple Method, which multiples a market-determined ratio (called a multiple) to some value of the target firm to estimate the target’s value. The market multiple can be based on net income, earnings per share, sales, book value, or number of subscribers.

l) Using the Zero Growth Model, P0 = D/r => r= D/p0 = 5/50 = 10%

m) Any change of any input used to develop a stock’s price can cause the change of the stock’s price, such as the change of risk-free rate, market risk premium, the stock’s beta coefficient, its expected growth rate and its dividend.

P = d/(r-g) = 2/(10%-5%) = 40; if g falls to 4%, P = 2/(10%-4%) = 33.33, if g raises to 6%,

P = 2/(10%-6%) = 50; if r is 9%, P = 2/(9%-5%) = 50, if r = 11%, P = 2/(11-5%) = 33.33

n) Market Equilibrium is the condition under which the intrinsic value of a security is equal to its price; also, when a security’s expected is equal to its required return.

o) 2 conditions, which are: 1) A stock’s expected rate of return as seen by the marginal investor must equal its...