Aem4620

AEM4620: Advanced Financial Modeling

Homework Assignment #3

Due date: September 26, 2016 before the lecture

Note: The following questions are derived/modified from exercise questions in Chapters 2 and 3

of the SB textbook.

Chapter 2: Question 4

Use the template for the ABC Corp. valuation in section 2.7 to value Cisco stock. Assume

that the weighted average cost of capital for Cisco is 18%, the growth rate for years 1–5

is 8%, and that the long-term growth rate is 4%.

Chapter 3: Question 1

ABC Corp. has a stock price P0 = 70. The firm has just paid a dividend of $4 per share,

and intelligent shareholders think that this dividend will grow by a rate of 7% per year.

Use the Gordon dividend model to calculate the cost of equity of ABC.

Question 2

Unheardof, Inc., has just paid a dividend of $6 per share. This dividend is anticipated to

increase at a rate of 20% per year. If the cost of equity for Unheardof is 25%, what should

be the market value of a share of the company?

Question 4

Consider the following dividend and price data for Chrysler:

Use the Gordon model to calculate Chrysler’s cost of equity at end-1996 on the basis of

dividends only.

Question 5

The current stock price of TransContinentalAirways is $70 per share. TCA currently pays

an annual per-share dividend of $4. Over the past 5 years this dividend has grown annually

at a rate of 25%. A respected analyst assumes that the current growth rate of dividends

will hold up for the next 10 years, after which dividend growth will slow to 5% annually.

Use the twostagegordon function to compute the cost of equity.