CHAPTER 9 HOMEWORK 1. The following table contains information about the estimated next year's EPS, payout ratio, shareholders' required rate of return, and return on equity of four different companies: Company A Company B Company C Company D EPS $0.75 $1.00 $1.25 $1.50 Payout Ratio 30% 50% 60% 40% Required rate of Return 13% 11% 12% 14% ROE 16.00% 15.00% 14.00% 16.00% a) Calculate each company's future earnings growth rate. Using the earnings model, what is the value of the stock? b) Using the constant-growth dividend discount model, what is the value of the stock? c) Assume that the companies will experience the growth rate determined in part (a) for a short period of time, and after that the firms will grow at a lower rate. These periods of time and second growth rates are the following: Growth Rate #2 Growth Rate #1 Time Company A 5.00% 2.00 years Company B Company C Company D 4.00% 3.00% 4.00% 3.00 years 4.00 years 3.00 years Using the two-stage dividend growth model, what is the value of the stock? Calculate your solution using equation 9-5 on page 260. d) Assume that the transition between growth rates 1 and 2 will be gradual rather than instantaneous. The forecasted transition periods are the following: Company A 3.00 vears Company B Company C 4.00 vears 2.00 vears Company D 4.00 vears Transition Period Calculate your solution using equation 9-8 on page 264. e) Create a Scatter chart to show the relationship between the value of the stock and the dividend payout ratio using Company D. Can you observe any price that is extremely different from the rest? Interpret your results