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    Chapter 10 Final Answers

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    Vanessa Leong
    This document summarizes answers to questions from Chapter 10. Key details include: 1) Present values were calculated for stock prices at different dates between $1.3250 and $1.6103. 2) The terminal date when growth becomes constant is the end of year 2. 3) Calculations were shown for dividend yield, capital gains yield, required rates of return, stock prices, and net present values for various growth scenarios. 4) Longer periods of high growth increase stock value but total return remains the same, with dividend yield starting lower and capital gains yield starting higher initially.

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    Chapter 10 Final Answers

    Uploaded by

    Vanessa Leong
    45 views3 pages
    This document summarizes answers to questions from Chapter 10. Key details include: 1) Present values were calculated for stock prices at different dates between $1.3250 and $1.6103. 2) The terminal date when growth becomes constant is the end of year 2. 3) Calculations were shown for dividend yield, capital gains yield, required rates of return, stock prices, and net present values for various growth scenarios. 4) Longer periods of high growth increase stock value but total return remains the same, with dividend yield starting lower and capital gains yield starting higher initially.

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    This document summarizes answers to questions from Chapter 10. Key details include: 1) Present values were calculated for stock prices at different dates between $1.3250 and $1.6103. 2) The terminal date when growth becomes constant is the end of year 2. 3) Calculations were shown for dividend yield, capital gains yield, required rates of return, stock prices, and net present values for various growth scenarios. 4) Longer periods of high growth increase stock value but total return remains the same, with dividend yield starting lower and capital gains yield starting higher initially.

    Copyright:

    Attribution Non-Commercial (BY-NC)
    Download as DOCX, PDF, TXT or read online from Scribd
    Download as docx, pdf, or txt
    45 views3 pages

    Chapter 10 Final Answers

    Uploaded by

    Vanessa Leong
    This document summarizes answers to questions from Chapter 10. Key details include: 1) Present values were calculated for stock prices at different dates between $1.3250 and $1.6103. 2) The terminal date when growth becomes constant is the end of year 2. 3) Calculations were shown for dividend yield, capital gains yield, required rates of return, stock prices, and net present values for various growth scenarios. 4) Longer periods of high growth increase stock value but total return remains the same, with dividend yield starting lower and capital gains yield starting higher initially.

    Copyright:

    Attribution Non-Commercial (BY-NC)
    Download as DOCX, PDF, TXT or read online from Scribd
    Download as docx, pdf, or txt
    of 3

    Chapter 10 Answers

    Question 10-1 Answers D1 = $1.3250. D2 =$1.4045 D3 =$1.4888 D4 =$1.5483 D5 =$1.6103 $22.50 $9.17 12.35% a) The terminal, or horizon, date is the date when the growth rate becomes constant. This occurs at the end of Year 2. b) $31.29 c) $27.69 Each share of common stock is worth $48.33 10% a) 13.33% b) 10.0% c) 8.0% d) 5.71% a) $125 b) $83.33 a) 10% b) 10.3813% $25.64 $13.11 a) 1) $9.50 2) $13.33 3)$21.00 4) $44.00 b) 1) Undefined 2) -$48, which is nonsense These results show that the formula does not make sense if the required rate of return is equal to or less than the expected growth rate. c) No, the results of Part b show this. It is not reasonable for a firm to grow indefinitely at a rate higher than its required return. Such a stock, in theory, would become so large that it would eventually overtake the whole economy $27.22 $23.77 a) $713.33 million b) $527.89 million c) $42.79 6.25% a) $2.31525 b) $5.28

    10-2 10-3 10-4 10-5

    10-6 10-7 10-8

    10-9 10-10 10-11 10-12 10-13

    10-14 10-15 10-16 10-17 10-18

    c) d) e) f)

    10-19

    10-20 10-21

    10-22 10-23

    $24.72 $30.00 = Maximum price you should pay for the stock. $30.00 No. The value of the stock is not dependent upon the holding period. The value calculated in Parts a through d is the value for a 3-year holding period. It is equal to the value calculated in Part e. Any other holding period would produce the same value of P0 ; that is, P0 = $30.00 a) Dividend yield =2.53%; Capital gains yield =5.47% b) Due to the longer period of supernormal growth, the value of the stock will be higher for each year. Although the total return will remain the same, rs = 10%, the distribution between dividend yield and capital gains yield will differ: The dividend yield will start off lower and the capital gains yield will start off higher for the 5-year supernormal growth condition, relative to the 2-year supernormal growth state. The dividend yield will increase and the capital gains yield will decline over the 5-year period until dividend yield = 4% and capital gains yield = 6% c) the capital gains yield will equal gn = 6%; dividend yield= 4% d) Some investors need cash dividends (retired people), while others would prefer growth. Also, investors must pay taxes each year on the dividends received during the year, while taxes on the capital gain can be delayed until the gain is actually realized. Currently (2008), dividends to individuals are now taxed at the lower capital gains rate of 15% $7.52 a) $24,112,308 b) $321,000,000 c) $228,113,612 d) $16.81 $35.00 a) D2009 =$2.01 D2010 =$2.31 D2011 =$2.66 D2012 =$3.06 D2013 =$3.52 b) $39.43 c) Dividend yield= 5.10%; Capital gains yield=6.90%; expected total return= 12.00% Dividend yield= 7.00%; Capital gains yield=5.00%; expected total return= 12.00% d) People in high-income tax brackets will be more inclined to purchase growth stocks to take the capital gains and thus delay the payment of taxes until a later date. The firms stock is mature at the end of 2013. e) Since the firms supernormal and normal growth rates are lower, the dividends and, hence, the present value of the stock price will be lower. The total return from the stock will still be 12%, but the dividend yield will be larger and the capital gains yield will be smaller than they were with the original growth rates. This result occurs because we assume the same last dividend but a much lower current stock price.

    f)

    As the required return increases, the price of the stock goes down, but both the capital gains and dividend yields increase initially. Of course, the long-term capital gains yield is still 4%, so the long-term dividend yield is 10%.

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