10-1

ROE=16% RR=60% g=RR(.60)x ROE(.16) g=9.6%

10-2

Net income=200 MILLION COMMON EQUITY=833MILLION RR=70% g?

ROE=Net income/common book value ROE=200,000,000/833,000,000 ROE=24%

g= RR x ROE g=.70x .24 g=16.8%

10-3

Do=3.50 g=5% Vcs? K=20% D1=3.50(1+.05) D1=3.675

Vcs=D1/K-g Vcs=24.5

10-4

Do=3.75 ROE=24% RR=25% K=20% Vcs? g=6% D1=3.75(1+.06) D1=3.975

Vcs=D1/k-g Vcs=28.4

10-5

Do=1.32 g=8% k=10.5% Vcs? D1=1.43 Vcs=D1/k-g Vcs=57.024

Yes , I should make the investment

10-6

ROE=18% RR=40% g=.18 x.40 g=7.2%

If RR increase (for example=60%) g=10.8%, the value of its common stock will increase

10-7

RR=25% ROE=20% P0=33 D0=2.30 g=5% D1=2.42

Vcs ? , If k=15% Vcs=2.42/(.15-.05) Vcs=24.2

B: P0(33)>Vcs(24.2)---------NOT TO PURCHASE
K=(2.42/33)+g k=12.3% , required rate(15%)>expected rate(12.3%)----NOT TO
PURCHASE

10-8

ROE=13% RR=20% g=RR(.20) x ROE(.13) g=2.6%

B: i: RR=35% --g=4.55%

Ii: RR=13%----g=1.69%

When RR decrease, the g will decrease. When RR increase , g will increase

10-9

RR=12/20 =0.6 ROE=0.2 G=RR*ROE = 0.6*0.2 G=12%

D1=8*(1+0.12)=8.96
P0=D1/(k-g) P0=8.96/(0.15-0.12) = 298.67
RR=8/20 =0.4 ROE=0.2 G=RR*ROE = 0.4*0.2 G=8%
D1=12*(1+0.08)=12.96
P0=D1/(k-g) P0=12.96/(0.15-0.08) = 185.14
RR=16/20 =0.8 ROE=0.2 G=RR*ROE = 0.8*0.2 G=16%
D1=4*(1+0.16)=4.64
P0=D1/(k-g) P0=4.64/(0.15-0.16) = - 464

10-10

When dividend/share=8 When D/share=5

G=5% P0=100 G=8% P1?
D1=8 D1=5
K=(8/100)+.05K=13.% P1=5/(.13-.08)p1=100
ROE = K = 13% So the price will not change so if the company will cut it is
dividend will not add value to the company

10-11

P0=100 g=4% dividend=$10/share dividend=$ 6/share g=7% p1?

When dividend=10/share When dividend=6/share

 D1=10(1+.04)D1=10.40 D1=6(1+.07)-D1=6.42
K=(10.40/100)+.04-K=14.40% V=D1/(k-g)
P0=100 Vcs = 6.42/(0.144-0.07)= 86.76
ROE<K 13<14.4% So price decrease

10-15

D=$6 K=12% Vps=D/K Vps=6/.12 Vps=$50

10-16

P0=$33 D=$3.60

A: K=10% Vps=D/K Vps=3.60/.10 Vps=$36

B: market price(33)<stock value(36)--investor should acquire the stock

Kps=D/P0 Kps=10.9% , required rate(10%)<expected rate(10.9%)-so acquire the stock

10-17

D rate=14% par value=100 k=12% Vps=D/K Vps=$116.66

10-18

D=3.40 P=$40 K=10% Vps=$34 expected rate=8.5%

Market price(40)>stock value(34)-sell the shares

Required rate(10%)>expected rate(8.5%)-sell the shares

10-19

P=$25 D=$4.50 K=14%

A: Vps=$32.14

Market price(25)<value of the stock(32.14)-I should purchase the stock

Expected rate=D/P0 K=18%--required rate(14%)<expected rate(18%)so, purchase the

stock