# Question

Using the original data from problem 5, find P0 by following the steps described.

a. Project dividends for years 1 through 3 (the first year is already given). Round all values that you compute to two places to the right of the decimal point throughout this problem.

b. Find the present value of the dividends in part a using a 13 percent discount rate.

c. Project the dividend for the fourth year (D4).

d. Use Formula 7–5 on page 168 to find the value of all future dividends, beginning with the fourth year’s dividend. The value you find will be at the end of the third year (the equivalent of the beginning of the fourth year).

e. Discount back the value found in part d for three years at 13 percent.

f. Observe that in part b you determined the percent value of dividends for the first three years and, in part e, the present value of an infinite stream after the first three years. Now add these together to get the total present value of the stock.

g. Compare your answers in part f to your answer to problem 5. There may be a slight 5 to 10 cent difference due to rounding. Comment on the relationship between following the procedures in problem 5 and problem 7.

a. Project dividends for years 1 through 3 (the first year is already given). Round all values that you compute to two places to the right of the decimal point throughout this problem.

b. Find the present value of the dividends in part a using a 13 percent discount rate.

c. Project the dividend for the fourth year (D4).

d. Use Formula 7–5 on page 168 to find the value of all future dividends, beginning with the fourth year’s dividend. The value you find will be at the end of the third year (the equivalent of the beginning of the fourth year).

e. Discount back the value found in part d for three years at 13 percent.

f. Observe that in part b you determined the percent value of dividends for the first three years and, in part e, the present value of an infinite stream after the first three years. Now add these together to get the total present value of the stock.

g. Compare your answers in part f to your answer to problem 5. There may be a slight 5 to 10 cent difference due to rounding. Comment on the relationship between following the procedures in problem 5 and problem 7.

## Answer to relevant Questions

If D1 = $3.00, Ke = 10 percent, and g = 8 percent, can Formula 7–5 be used to find P0? Explain the reasoning behind your answer. Explain why the statement of cash flows is particularly relevant in light of the fact that the accrual method of accounting is used in the income statement and balance sheet. In problem 10, if total debt were increased to 50 percent of assets and interest payments went up by $300, what would be the new value for return on equity? Explain why in problem 3 return on equity was so much higher than return on assets. Do the stocks of acquiring companies tend to show strong upward market movement as a result of the merger process? Comment on the reasoning behind your answer.Post your question

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