FNCE 100 FINAL CHEAT SHEET  Annuity in advance same as annuity in arrears plus initial payment Stock Valuation

 Annuity in advance same as annuity in arrears plus initial payment Stock Valuation – For stock valuations with a stream of changes, start at the latest div or rate change chunk, then
Chapter 17 – Cost of Debt and Optimal Capital Structure calculate the Price at that date start date, not the date of first dividends because stocks are valued at the date before
Formulas Capital Budgeting dividends. With this Px, sub it into the last value of the next earlier chunk that you evaluate, and so on.
Vl = Vu + PVTS – PVCFD Formulas Finding Number of Shares – Divide amount invested by the stock price. The share price is the presnt value of the cash

C 1 , i = x then accept if I >R

CFD = Costs of Financial Distress flows, so to find the price of the stock, we need to find the cash flows. CF’s include dividends and sale price. Remember
Notes Tax.
 Stockholders bear reduction in stock price costs from bankruptcy lRR: 0= -OF + Calculating P/E Ration – Always use the current earnings under the stock price, the stock price includes future cash
 CFD high when:assets lost during bankrupt, assets generate volatile earnings, much of value depends on
future investment ie R&D
1+ i flows, while the current earnings do not include future earnings
Finding Rate for Discounting – (1+APR/n)n = 1+EAY…. What if given APR x% that’s compounded semiannually, but
 Risk is a function of: Business risk(risk from all equity going broke) and Financial leverage(risk form CF = want the quarterly rate?? THEN, take (1+ semiannual rate) .5 -1 = quarterly rate. X% APR compounded semiannualy


leveraging). Companies with high business risk have low leverage
Agency Costs – self interested managers, exec perks, reduced effort ( REV −CashCost ) ( 1−TaxRate ) +TaxRate∗Depreciation yields a x/5% semi annual rate.
EAC Budgeting Comparison – Use EAC, matching cycles, or salvage method only when projects flows continue in
perpetuity, yet if projects for some reason have a clearly established cash flow just compare the total NPV’s. Back to
o Free Cash Flow Theory – lots of money to squander CF = AT Income + Depreciation
 LBO’s – managers buy out stockholders with lots of debt at premium -Add in after tax salvage value discounted by T at the end of the CF line for IRR calculation [and any other one time EAC method, after finding the NPV’s of each project, do NPV = C ATT where C is the unknown and solve for the
o up tax shield, down agency costs, up CFD(b/c more debt) incidental cost or revenue]) equivalent cash flow of each project, choose the higher cash flow.
o Ideal for companies with stable cf’s tangible assets -Initial investments for project are subtracted at beginning and added back discounted at the end and adjusted for Interest Rate and Bonds – CH 8
taxes Formulas
Modern Portfolio Theory – Ch 10, 13
Yield to Maturity = Current Yield + Appreciation to Maturity
Formulas ß port = weight%a(ßa)+…
PVAnn R = c*Par/P + (Par-P)/P, c = coupon rate, C*Par = interest received

¿ + P1−P 0
ß risk free = 0
Growth Rate in Div = Expected %age capital gain or loss on stock
ß market = 1 EAC = Equivalent Annual Cost lets you compare NPV’s of different times, compare the cash flows,

x A TR
Return =R= = Div Yield + Capital Gain Clean Price = Dirty Price – Accrued Interest
Capital Market Line –
P0 P0 Accrued Interest = Coupon Pmnt for period x (Fraction of Period elapsed since payment)
efficient set of portoflios
Current Yield = Coupon Amnt/Price of Bond
formed by risky and
c∗Par c∗Par +1000
pick the higher
Fisher Eq = (1+R) = (1+r)(1+h), r = real return, h = inf rate, R = nom return riskless asset each point Cash from Asset Sale = MV – Tax(MV-BV)
Avg Risk Premium = AvgReturn - AvgRiskFreeRate
Variance = Sum(x-xbar)2/n-1
on line is a portfolio Net Working Capital = Diff Current Assets – Current Liabilities, increase in NWC is an outflow, decrease is an inflow P= +
1+r 1 (1+r 2)2
CAPM: Ra = Rf + ßx(Rm- Notes
SD Yearly = sqrt(12)*SD[monthly] Rf) -NPV Approach – Find total NPV of projected cash flows, accept if NPV >0
Cov(Ra,Rb) = corr(ra,rb)*SD(a)*SD(b), corr(Ra,Rb) =cov(ra,rb)/SD(ra)*SD(rb) ∆ = swing call/swing Payback –p is the number of years before the sum of cash flows exceeds the initial outlay, P* is the amount of
Rp= Xa∗Ra+ Xb∗Rb , X = proportion in port, R =
stock
Value Arbitrage = S = ∆ *
maximum years willing for payback, Accept if p < or equal to p*, reject if not c∗Par c∗Par + Par
C – PV(E)
-IRR – Internal Rate of Return -Defined as the discount rate that makes the NPV of discounted CF’s equal 0, Accept if
P= +  YTM = y = here is average of spot rates
1+ y
expected return on asset IRR > r, reject if not 2
Var(Rp) = PutCallParity: P+S=PV(E)
+C
-Mutually Exclusive Projects -Differing decisions between projects, one has higher NPV, one has higher IRR, Use an
“Incremental Cash Flow approach to reconcile IRR ranking with that of NPV” then investment of B-A, then tells
(1+ y )
( 1+ r 2 )2
whether to follow NPV or IRR, B = A + (B-A), See if IRR of incremental investment (B-A) > r, if it is, then invest in B,

Xa2 σ 2 + Xb2 σ 2 +2 XaXb∗cov ( Ra, Rb) = σ , if p = 1 σ = XaXb + σa σb 2

At NPV A = NPV B indifferent between both, If r >= IRR (B-A), accept project A, <= accept B
-Project Interactions - Matching Cycles - Find least common denominator and compare projects over that life span, F2 =
−1
Cov(Ra , Rm) ρ∗σ
A one cycle = 10 + 5A3, 1% and B one cycle = 20 + 10A4, 1% THEN A for 4 cycles = PV A4 = A one cycle+
A/(1+R)^3,6,9 AND B for 4 cycles = PV B4 = B one cycle + B/(1+R)^4,8 1+r 1
β = responsiveness of the fund to movements in the market = = - EAC = PV/xATR - compare the C’s of each project and choose the higher one, use generally if investments go on for a Expectations Hypothesis = f2 = E(1r2)

σ 2 mkt σm while. Liquidity Hypothesis = f2> or < E(1r2). Buy a two year zero coupon bond or two one year zero coupon bonds. Under
-Determining Cash Flow -- Cash Flow = AT Income + Depreciation, CF = (Rev – CC)(1-T) + T(Depr) Expectation, those are equal when f2 = r2. Liquidity says they will only be equal when spot rate > forward rate
-Depreciation = Tax Shield = T (Depr) because of risk. OR invest in 1 year bond or two year bond but sell after one year. Then forward has to be greater than
Expected Market Return = E(Rm) = Rf + Historical Risk Premium
Valuing Stocks the spot spot rate r2 to make them equal because of risk.
Forecasted Stock Return = Rf + β*[E(Rm)-Rf]
PROBLEMS 1r2 = return on a bond issued one year from now maturing in two years
Notes
How to equate NPV’s through Tax rate Adjustment Notes
 SML – Line from Rf to Rm, B = 1. Security above SML is underpriced, below SML is overpriced. E(Rp)<E(Rc),
 Assume Semiannual Compounding for Bonds
c below SML and is underpriced
Formulas Common Stock – Constant growth in divs, P = Div/(r-g)  If rates fall (YTM<coupon rate) bond price > P so is Premium
 SD for individual securities: higher than those for mkt Preferred Stock – Constant dividends = P = Div/r
P0=  If rates rise (YTM > coupon rate) bond price < P so is Discount
 Systematic risk – market risk that you cant avoid g = ROE x PB, return on equity times plowback,
P0 = Constant Dividends (Preferred Stock)  Dirty Price is Invoice Price
 Idiosyncratic risk – can be eliminated by diversification plowback = retained earnings/earnings = retention
P0 = Constant growth Dividends (Commn)  At T >1, we need 2 discount rates: r1 and r2 are spot rates. R2 likely > R1 bc of risk
 Expected return with any number of securities is same, only variance decreases as n increases. Expected ration, pay out ratio = 1- plowback ratio
return graph will be horizontal, adding securities lowers risk while maintaining return g=ROExPB …. PB + PO = 1 Growth – P = EPS/r + NPVGO Value = Debt + Equity Value Levered = Vu + TcD = Value Unlevered =
Return and Risk – Ch 11 Share Price = Div0 + (Div1)/(r-g) + … Growth does not necessarily raise share value Vu = CF/rA EBIT(1-Tc)/rA
Formulas Notes Only growth generated by earnings retained and rA = cost of capital unlevered firm = re MM Prop2 = rE=rA + D/E(rA-rD) re>ra>rd
Notes NPVGO and P > EPS/r invested in positive npv projects creates positive
NPVGO = net present value of growth determines re = cost of equity levered Ra=rwacc=D/(D+E)*rD+E/(D+E)*rE
-Opportunity Set – curved line depicting possible achievable points of combinations of two securities – determined Price to Earnings Ratio = P/E = (1-PB)/(r – PBxROE)
the intrinsic value of a new project, calculated by rwacc = be careful… BreakEven EBIT = When Capitalization plans result in
by rate return on each stock, Backward bending on left side indicates that SD decreases as return increases –due to Cash Cow – EPS = DIV, value of stock = EPS/R
taking discounted net CF inflow – purchase price of Vl = CF/rwacc same EPS
diversification, Efficient Frontier – from min port var to highest point on ,Normal curve case is of 0 correlation, line Growth – NPVGO , value = EPS/r + NPVGO
asset rD+rE = 1 EPS = (EBIT –RDD)/SharesOutstanding
is 100% corr, kinked < looking line is 100% negative corr P/EPS = 1/R + NPVGO/EPS
-Best point on a efficient frontier curve to combine with cash is where it and the individual asset line are tangent rD = borrowing rate EBIT-RDD gives NI, set the EPS of two cap structs == to
-Beta is a measure of fund responsiveness to mkt, portfolio beta is the weighted avg of betas of individual stocks. Value Max = min(rwacc) find EBIT Vu = EBIT/WACC (no taxes)!
Beta mkt = 1 Share Price = Equity/Shares outstanding = (value of Vu = EBIT(1-Tc)/WACC
-Beta of a Project: Scale Enhancing Project – project has firm’s beta, Non Scale Enhancing Project – project should be shares repurchased)/(# repurchased) WACC = Cost of Equity Capital = Ra
discounted at beta related to project and to its leverage Shares Repurchased = Debt Issued/Share Price Annual Tax Savings from Lever = TCrDD
-Determining a project’s cost of capital:1)find industry that mirrors project 2) find re for each firm in industry 3) find New Amount of Shares = all equity total – repurchased rD = interest rate, D = amnt borrowed, TC = tax rate
ra for each firm in industry 4) find avg ra 5) rind re and rwacc for project amount MM Prop1: VL=VU + PVTS = VU+TCD
Options – Ch. 22 ROE = NI/Equity (1.0 MKT to Book Ratio) Diff in CF to investors = (CF-rDD)(1-TC) +rDD-CF(1-
Formulas Call Price = S – PV(E) EPS = earnings per share TC)=TCrDD
Put Call Parity: Price Underlying Stock = Price Call – Price Put + PV Strike Call Price Arbitrage: Return = EPS/Price Diff in CF to investors = annual tax savings from lev
Covered Call: Price Underlying Stock – Price Call = -Price Put + PV Strike S = [StockPrice∆/(HighS – Individual CF = EPS*#shares held MM Prop2 = rE = rA+D/E *(1-TC)(rA-rD)
Black Scholes Model: C = S*N(d1) – Ee-Rt*N(d2) E)]*C+LowS/(1+r) Share Price (with lev) = Debt/# Shares Repurchased
Value increase to lev firm = TaxShield Y1/(1+r) + Tax
d1=[ln(S/E) + (R+ σ2/2)t]√ ( σ2t) Call Intrinsic Val = S-E EPS = NI/Shares
d2 = d1-√ ( σ2t) Shield Y2/(1+r)^2
Put Intrinsic Val = E-S MM Prop1 = Value Levered = Value Unlevered
RWACC= rA(1-(Tc(D/V)) use this!
Notes Market Value Balanche Sht = T acct with assets on one
 Option – contract giving owner right to by or sell an asset at a fixed price on or before a given date side d and e other
o Exercising Option – buying or selling the actual stock
Ex Set tax rate so annuity of project to change is also the annuity rate of the other project. IE if you find that the NPV  F2 = rate you lock in for the second year when you buy a two year bond. One year rate one year from now
o Strike Price – Fixed price at which holder can buy or sell
of a project of cash flows is x, the annuity would be x = C * ATR, and C is the annuity rate. Set the new tax projects implicit in the two year spot rate ie forward rate
o Expiration Date – Maturity date, on or before it is dead annuity rate to C from the other project and find the new NPV of new project. Solve for T. Efficient Capital Markets and Structures – CH 14
 Call Option – gives owner right to buy asset at fixed price Delayed Annuity – Annuity formula yields an annuity whose first payment is one year after the annuity. Ptoday = Pyesterday + Trend+ RandomError
 Pricing a Call Option – Exercise Price, Expiration Date, Stock Price, Variability of Underlying Asset, Interest -Beginning Annuity – Do C0 + CA T-1R Arbitrage – Generating profit from simultaneous purchase and sale of substitute securities, Representativeness –
Rate Infrequent Annuity – Find interest rate over the period of intermittent cash flows ie 2 yrs. (1+r)*(1+r) -1 = new rate. deviation from rationality drawing conclusions insufficient data, conservatism – too slow to adjust new info
 Put Option – gives holder the right to sell 100 shares of a security at fixed price within a fixed time period Find the annuity over T/intermittent years at int rate new rate. Forms of Market Efficiency: Weak Form – Ptoday = Pyesterday + Trend+ RandomError: Market prices reflect
 Option Strategies: Straddle – Both a put and a call on the same security at the same striking price, Strangle – Equate PV’s of Annuities – 1)Calculate PV of Annuities, discounted to date 0 2) Calculate annual C’s that would yield a information containted in historical prices. Investors are unable to earn abnormal returns using historical prices to
Both a put and a call on the same security at different striking prices PV of PV Annuity year 0 by C x ATr = PV, find C 3) This finds the necessary CF’s. predict future price movements. Semi Strong Form – In addition to historical data, market prices reflect all publicly
 Put Call Parity – two ways of buying a protective put(buying a put then buying the underlying stock Get Monthly or Quarterly or SemiAnnual Rate - if is 12% compounded monthly, then monthly rate = .12/12 and available information. Investors with insider or pricate information are able to earn abnormal returns. Strong Form –
[protective measure if you have an unrealized gain and don’t want to lose it]) semiannual rate = (.12/12)6-1. If it is x% compounded annually, then quarterly rate = (1+r)1/4-1 Market prices reflect all information public or private. Investors are unable to earn abnormal returns using insider
o Buy a put and buy the underlying stock simultaneously. Cost = price of underlying stock + Get Nominal Cashflows – increase each item in the income statement by the inflation rate, except for depreciation or information or historical prices to predict future price movements.
price of put recovery of networking capital. Find nominal cash flow for each year individually, increasing each value each year by Abnormal Returns – investors on average merely earn what the market offers, all trades have NPV =0.
o Buy the call and buy a zero coupon bond. Cost = price call + price of zero coupon bond = inflation. Capital Structure– CH 16
price call + PV exercise price NPV and IRR for Replacement Machine – The same as two competing projects: purchase new vs keep old. Initial cost Formulas
 Covered Call: Buying a stock and writing the call on the stock simultaneously. == selling a put and buying a of new machine is cost of machine plus increase in net working capital. Initial cash outlay for old machine is MV of old Notes
zero coupon bond machine plus any tax consequence. Depreciation is generally only CF consideration  If D/V = x, D=x*VL  using VL not V!
Future and Present Value When to abandon a CF Project – abandon if the cash flow from selling the equipment is greater than the present value  Although D+E=V, after leverage, E and V will have diff values with taxes because with taxes leverage increases
Notes of the future cash flows. We need to find the sale quantity where the two are equal. Set cf from sale = NET CF per sale * value.
 APR compounded annually = EAY Q * AN-1R, find Q  When you recapitalize, you have a diff number of total shares than all equity
 APR = annual percentage rate, EAY = Effective Annual Yield Breakeven Analysis – Breakeven point is the after tax sum of the FC and the depreciation charge divided by the  While the expected return on equity rises with leverage, risk to stockholders rises
 APR to EAY = APR = x%, x%/12 = monthly rate, (1+monthlyrate)^12 -1 = EAY (selling price – VC) = Q* ----- Then to find the financial break even of an initial investment ie liscensing do EAC =  After issuing shares, cash increases and equity increases.
 EAY to APY=EAY^12-1=monthly rate, monthly rate*12=APR= investment/Annuity Factor  Shareholders equally well off with debt and equity financing in a world of no taxes!
 Annuity Valued at period before first period is due Adjusted Present Value, Flows to Equity and Weighted Average Cost of Capital – CH 18
APV: Value = UCF/rA + TcD
APV = NPV(all equity) + NPV(financing side effects)
APV = (-Outflow + PV (1-Tc)(CF) + PV(Dep Tax Shield = Tc*outflow/yrs)) + (Proceeds(Net of Flotation totatl) –
Aftertax PV Int Payments – PV Principal Payments + Flotation Cost Tax Shield
PVTS = TcD = Delta(Vu and Vl)
FTE: PVflow to equity = LCF/rE
LCF = (EBIT –rDD)(1-Tc)
LCF = UCF – AfterTaxInterest on Debt
RE=rA +D/E (1-Tc)(rA-rD)
Vfirm = Vdebt+Vequity
Wacc: NPV = UCF/rWACC - Initial Investment
D/V+E/V=1
RWACC= rA(1-Tc(D/V))
Cost of Debt = YTM company bonds
Problems
-Finding effect on stock price immediately after funding project on all equity. NPV of move = - project cost outflow +
CF/re. Price = (this NPV + total firm equity original)/#shares originally. This causes total equity to increase by NPV.
To find number of shares needed to fund this project, divide project cost by new share price. Share price after
purchase is made = total equity(original equity + project cost shares issued + NPV project)/(original shares + new
issued shares). Share price stayed the same before and after immediately after announcement and after deal was
done.
-Finding effect on stock price immediately after funding project on all debt. NPV of announcement = - project cost
outflow + CF/re. Price = (this NPV + original firm equity ie value)/#original shares. Share price stays same
immediately after announcement and after deal is done. Price of Share after deal finalized = Equity(original + NPV
project)/original shares. In absence of taxes, shareholders are equally well off with debt and equity!!
 Final Prac Issueance of Equity Ra = .12, E = 56 M, 4M shares, D = 70M r = .05
perp. Reorganization plan – buy back some debt thru issuance of 15M of new
equity. T = .34, no depr or cfd, r = .05
(a) Give: Stock Price at (i) now, (ii) at announcement, (iii) after announcement
(b) After reorganization in (a), now want to acquire new company for 10M,
generate EBIT of 3.5M perp annually. Re = .12, It will issue additional 10M of
equity and use proceeds to buy company.(i) at announcement, what is D/E ratio?
(ii) how many shares must be issued in order to get the 10M in new euqity?
(a) (i) Stock Price Now = Total equity/number shares, price = 14 = 56M/4M
(ii) Stock Price after announcement = (Current Equity Val – Lost Tax Shield)/#
Shares = (56M-.34*15M)/4M = 12.725
(iii) Stock Price after repurchase = New Val Equity / New # Shares = (Current
Equity Val –Lost tax Shield + Val Repurchased Equity)/(Old#shares + New
Equity/Price/Share) = (50.9M + 15M)/(4M + 15M/12.725) = 12.725
(b)(i) NPV Project= initial investment + (1-T)(EBIT)/r = -10M + (.66*3.5M/.12) =
9.25M
So, Equity is worth New Val Equity from (a) + NPV project = 65.9M + 9.25M =
75.15M, D = 70M-15M = 55M, D/E ratio = 55M/75.15M = .732
(ii) Stock Price after announcement = New Equity from (i) / new number of
shares from (a)(iii) = 75.15M/5178781 = 14.511. Number of shares needed =
money needed/new price = 10M/14.511 = 689132 Shares

Midterm 2 APV (20 points) MomCorp is considering a two-year project that requires
an investment of $1 million now. Under all-equity financing, the project would generate
after-tax cash flows (after consideration of any depreciation) of $750,000 one year from
now and $1,500,000 two years from now. The project has a zero salvage value at the
end of two years. The appropriate cost of capital is 15% with all-equity
financing.Suppose, however, that MomCorp will borrow $500,000 against the project
and this debt will be repaid in two equal installments. The borrowing rate is 10%. The
firm’s tax rate is 30%. Calculate the project’s Adjusted Present Value (APV).
Solution:
The net present value of the project for an all-equity firm would be NPVU=-
1,000,000+750,000/1.15+1,500,000/1.15^2=786,389.414. If $500,000 of the
project is financed with debt to be repaid in two equal installments of X, we must have
500,000=X/1.10+X/1.102 , which gives X=288,095.238. In the first year’s
installment, interest repayment is 500,000∙0.10=50,000 which generates a tax shield of
0.3∙50,000=15,000. The rest is the principal repayment 288,095.238-
50,000=238,095.238, reducing the debt outstanding in the second year to 500,000-
238,095.238=261,904.762. Therefore, the interest payment in the end of second year
is 261,904.762∙0.10=26,190.4762 which generates a tax shield of
0.3∙26,190.4762=7,857.14286. The present value of tax shields is PVtax
(10 points) Today is January 1. The stock of the NyanCat Corporation is currently shields=15,000/1.10+7,857.14286/1.10^2=20,129.8701 and the adjusted present
trading at $40 per share. Analysts are expecting the NyanCat Corporation to have $5 of value of the project is A𝑃V=NPVU+PVtax
earnings per share in the coming year. The company will reinvest 60% of these shields=786,389.414+20,129.8701=806,519.284.
earnings in projects that earn a 20% rate of return per year with the rest being paid out  
as dividends. Assume that earnings occur and dividends are paid at the end of the year.
Share Recap Midterm 2 (20 points) Big Kahuna Burger (BKB), an all-equity firm,
Assume that both the reinvestment rate of 60% and the rate of return of 20% will
continue indefinitely. is valued at $39.5 million. BKB expects $5 million in earnings after taxes each year
What would happen to NyanCat's stock price if, alternatively, the company were to cut into perpetuity. The firm has 500,000 shares outstanding. The firm’s tax rate is
its dividend payout ratio (i.e. the ratio of dividends to earnings) as of the end of this 35%. Suppose that BKB announces that it will borrow $30 million of perpetual debt
year to 25% every year with projects still earning 20% annually? Assume that the at an interest rate of 8% and simultaneously buy back $30 million worth of equity
company's risk is unaffected by the change in payout ratio. with the funds. Ignore personal taxes.
(10 points) Again, today is January 1. The NyanDog Corporation paid a dividend of $1 How many shares outstanding will BKB have after it buys back the equity?
per share yesterday. Analysts are forecasting that NyanDog will experience two years What are the firm’s expected earnings per share before AND after BKB issues debt
of growth of 10% per year in earnings and dividends, followed by three years of growth and buys back the equity?
of 5% per year in earnings and dividends. Earnings and dividends are paid at the end of What would the interest rate on the debt have to be so that the share repurchase has
the year. no effect on expected earnings per share?
Analysts are also estimating that, right after the dividends are paid at the end of year 5, Solution: After the announcement of the stock buyback, the value of the equity is
NyanDog will have a ratio of price to year 5's earnings equal to the average P/E ratio in EL=EU+tC∙D=$39,500,000+0.35∙$30,000,000=$50,000,000, and the per share
the relevant peer group, which is 22.4. Assuming that the discount rate for NyanDog is price is $50,000,000/500,000=$100. The number of shares that the firm buys
17% and that NyanDog will pay 90% of its earnings in dividends every year from year 1 back is $30,000,000/$100=300,000, so the firm has 500,000-300,000=200,000
through year 5, calculate NyanDog's share price. shares outstanding after it buys back the equity. For the unlevered firm, the earnings
Solution: per share are EPSU=$5,000,000/500,000=$10. In order to calculate the earnings
If we denote E=$ 5 , k =0.6 and r ¿ =0.2, then the expected per share for the levered firm, we first calculate the total before-tax earnings,
E=$5,000,000/(1-tc)=$5,000,000/(1-0.35)=$7,692,308. For the levered firm,
dividend per share at the end of the year is the earnings per share are EPSL=(E-rD)(1-tC)/200,000=$7,692,308-
0.08∙$30,000,000)*(1-0.35)/200,000=$17.20. The interest rate on debt must
D ( 1−k ) E=( 1−0.6 ) $ 5=$ 2 and the expected solve EPSU=EPSL, i.e., 10=7,692,308-rD∙30,000,0001-0.35200,000, which
givesrD=7,692,308-10∙200,0001-0.3530,000,000=0.15385.
growth rate in earnings and dividends is  

D
The forward rate between the end of year 1 and the end of year 3 is

g=k r ¿ =( 0.6 ) ( 0.2 )=0.12 . From P=

(1+r3^3)/(1+r1)-1≈17.31%.
The forward rate between the end of year 1 and the end of year 3,
r −g expressed in annual terms is:
Sqrt((1+r3)^3/(1+r1))-1≈8.31%.
D 2  
we calculate r= + g= +0.12=0.17 .
P 40
Therefore, if the company were to cut its dividend payout ratio to 25% every year, the

plowback ratio would increase to

k ' =0.75 and the new price would be