Week 9 HW for Chapter 8 Name : --------------------------------------------------------------------------------------------------------------------- Question 1 (see slide 6): You consulted your client to invest stock $ 2,500, Dividend 8%. You advised your client to hold the stock for five years. You project you will be able to sell it at the end of year 5 for $2,900 and required rate of return 9.5%. What is the Present value? Will it be worth to sell at the end of year 5. Explain it --------------------------------------------------------------------------------------------------------------------- Question 2 (Slide 10) [A] Use the dividend growth model to get the stock price at any point in time You helps your client determine the price of stock in 7 year: It supposes the dividend is $3.20, Rate is 8%, and growth rate is 6% P3 = D3 / (1 + g) / (R g) What is the Value of the dividends that will be paid between now and then. So the price in 7-year is .? [b] Calculation the total value of stock as the present value of the first three dividends plus the PV of the price at Time 7, P7? [C] Provide the brief interpretation on your calculation? ------------------------------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------------------------------- Question 3 Nonconstant Growth (see slide 12) Consider that case of a company that is currently not paying dividends. You predict that, in seven years, the company will pay a dividend for the first time. The dividend will be $0.30 per share. You expect that this dividend will then grow at a rate of 5% per year indefinitely. The required return on companies such as this one is 10%. What is the price of stock today? [1] Find out what is will be worth once dividends are paid; price in four years will be: P7 = D7 x (1 + g) / (R g) [2] If the stock will be worth $3 in four years, then we can get the current value by discounting this price back four years at 10%. What is the current value of stock? Po = [3] Provide a brief interpretation on your calculation? ------------------------------------------------------------------------------------------------------------