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2009-11-24 035628 Ttred
2009-11-24 035628 Ttred
a. The terminal, or horizon, date is the date when the growth rate becomes constant.
This occurs at the end of Year 2.
b. 0 r = 10%
s
1 2 3
| | | g = 20%
s gs = 20% gn = 5%
1.25 1.50 1.80 1.89
1.89
37.80 =
0.10 0.05
The horizon, or terminal, value is the value at the horizon date of all dividends
expected thereafter. In this problem it is calculated as follows:
$1.80 (1.05)
$37.80.
0.10 0.05
c. The firm’s intrinsic value is calculated as the sum of the present value of all
dividends during the supernormal growth period plus the present value of the
terminal value. Using your financial calculator, enter the following inputs:
CF0 = 0, CF1 = 1.50, CF2 = 1.80 + 37.80 = 39.60, I/YR = 10, and then solve
for NPV = $34.09.
7. What will be the norminal rate of return rate of return on a perpetual preferred stock
with a $100 par value, a stated dividend of 8% of par and a current market price of a $60,
b$80, c$100,d$140?
a. rp = $8/$60 = 13.33%.
b. rp = $8/$80 = 10.0%.
c. rp = $8/$100 = 8.0%.
d. rp = $8/$140 = 5.71%.
9. Bruner Aeronautics has perpetual preferred stock outstanding with a par value of $100.
The stock pays a quarterly dividend of $2 and its current price is $80. a. what is norminal
annual rate ofreturn? b. What is its effective annual rate of return?
a. The preferred stock pays $8 annually in dividends. Therefore, its nominal rate of
return would be:
Nominal rate of return = $8/$80 = 10%.
b. EAR = (1 + rNOM/4)4 – 1
= (1 + 0.10/4)4 – 1
= 0.103813 = 10.3813%.
18. Mitts Cosmetics Co.’s stock price is $58.88 and it recently paid a $2 dividend. This
dividend is expected to grow by 25% for the next 3years and then grow forever at a
constant rate, g a
The value of any asset is the present value of all future cash flows expected to be generated from
the asset. Hence, if we can find the present value of the dividends during the period
preceding long-run constant growth and subtract that total from the current stock price,
the remaining value would be the present value of the cash flows to be received during the
period of long-run constant growth.