Problem 7-1 on page 297

P0 = $ 15
P1 = $ 21
D1 = $ 0.9

Sol Dividend yield = D1/P0 = 0.9/ 15 =0.06 or 6 percent

Capital gains yield =( P1 - P0) / P0 = ( 21- 15) / 15 = 6/15 = 0.4 or 40 percent

Total return or yield = 6% + 40% = 46%

Problem 7-6 on page 297

g= 4% = 0.04
D0 = $ 5
rs = 12 percent = 0.12
P0 =?

sol P0 = D1 / (rs - g) = D0 (1+g) /( rs -g)

= 5 * (1+0.04) / (0.12 - 0.04)

= 5*1.04 / 0.08
65 dollars

Problem 7-8 on page 297

g= -5% = -0.05
D0 = $ 5
rs = 15 percent = 0.15
P0 =?

P0 = D1 / (rs - g) = D0 (1+g) /( rs -g)

= 5 * (1-0.05) / (0.15+ 0.05)

= 5*0.95/ 0.20
23.75 dollars

Problem 7-14 on page 297

D0 = $2
g = 5% = 0.05 0 1 2 3
rs =0.12 D0 D1 D2 D3
P0 P3
Cash flow received would comprises of D1, D2, D3 and P3

D1 = D0 (1+g) = $2 * (1+0.05) =$2 * (1.05) = $ 2.1

D2 = D1* (+g) = $ 2.1 *1.05 = $ 2.2
D3 = D2 (1+g) = $ 2.2* 1.05 = $ 2.31

P3 = D4 / (rs - g) = D3* (1+g) / (rs - g) = 2.31* (1+0.05) / (0.12 - 0.05)

= 2.31*1.05/0.07
34.65 dollars

Problem 7-17 on page 297

g= 4%
rs = 14 % = 0.14
g = 0.04 0 1 2 3
D0 D1 D2 D3
2.5 3 4
P0 ?? P3

P0 = Sum of PV of D1, D2, D3, and P3

P3 = D4/ (rs - g) = D3(1+g) / (rs - g) = 4 * 1.04 / (0.14 -0.04) = 4 * 1.04 / 0.10

P3 = $ 41.60

PV of D1 = D1 / (1+rs) =2.5/(1+0.14) = 2.5/1.14 = $ 2.193

PV of D2 = D2 / (1+rs)^2 =3/(1+0.14)^2 = 3/1.14^2 = $ 2.308
PV of D3 = D3 / (1+rs)^3 =4/(1+0.14)^3= 4/1.14^3 = $ 2.7
PV of P3 = P3 / (1+rs)^3 =41.6/(1+0.14)^3= 41.6/1.14^3 = $ 28.07

Therefore, P0 = $ 2.193 + $ 2.308 + $ 2.7 + $ 28.07 = $35.27

Problem 7-23 on page 299

Part A D0 = 2.25
g = 5% = 0.05
rs = 15.5%= 0.155

P0 = D1 / (rs - g) = D0 (1+g) / (rs -g)

= 2.25*1.05 / (0.155 -0.05)
= 2.25*1.05 / 0.105
22.5 $

Part B rs = 13.5% = 0.135

P0 = D1 / (rs - g) = D0 (1+g) / (rs -g)

= 2.25*1.05 / (0.135 -0.05)
 = 2.25*1.05 / 0.085
27.79 $

Part C rs = 12%

P0 = D1 / (rs - g) = D0 (1+g) / (rs -g)

= 2.25*1.05 / (0.12 -0.05)
= 2.25*1.05 / 0.07
33.75 $