ExercisesChapter9

Exercises Chapter 9
Q1.
Using the constant growth model:
The current stock price:
𝐷1 𝐷0 𝑥 (1+𝑔) 2.07 𝑥 1.043
𝑃0 = = = = $32.22
𝑟−𝑔 𝑟−𝑔 0.11−0.043
The stock prices in 3 years will be:

𝐷4 𝐷0 𝑥 (1+𝑔)4 2.07 𝑥 1.0434
𝑃3 = = = = $36.56
𝑟−𝑔 𝑟−𝑔 0.11−0.043
The stock prices in 15 years will be:

𝐷16 𝐷0 𝑥 (1+𝑔)16 2.07 𝑥 1.04316
𝑃15 = = = = $60.60
𝑟−𝑔 𝑟−𝑔 0.11−0.043
Q2.
Using the constant growth model, we can solve the equation for R:
𝐷1 2.95
𝑟= +g= + 0.048 = 10.36%
𝑃0 53.1
Q3.
𝐷1 2.95
Dividend yield = = = 5.56%
𝑃0 53.10
The capital gains yield is the same as the dividend growth rate.
=> Capital gains yield = 4.8%
Q4.
Using the constant growth model:
1𝐷 3.25
𝑃0 = 𝑟−𝑔 =
0.105−0.05
= $59.09
Q5.
The capital gains yield is the same as the dividend growth rate, so:
r = Dividend yield + Capital gains yield = 0.052 + 0.049 = 10.1%
Q6.
r = dividend yield + capital gains yield = 9.9%
Dividend yield and capital gains yield are equal, so:

9.9%
Dividend yield = capital gains yield = = 4.95%
2
𝐷1
Dividend yield = => 𝐷1 = Dividend yield x P = 4.95% x 74 = $3.663
𝑃
𝐷1 3.663
𝐷1 = 𝐷0 x (1+g) => 𝐷0 = = = $3.49
1 +𝑔 1 + 4.95%
The current dividend is $3.49
Q8.
The dividend is the same every year in perpetuity
𝐷1 𝐷1 3.75
=> 𝑃0 = => r = = = 4.63%
𝑟 𝑃0 81
Q9.
g = ROE x retention ratio = 13% x 80% = 10.4%
Next year’s earnings = current earnings x (1 + g)

= 17,500,000 x ( 1 + 10.4%) = $19,320,000
Q14.
𝐷1 = $9, 𝐷2 = $7, 𝐷3 = $5.75, 𝐷4 = $2.55
g = 4.5%
r = 10%
𝐷5 𝐷4 (1+𝑔) 2.55(1+4.5%)
P4 = = = = $48.45
𝑟−𝑔 𝑟−𝑔 10%−4.5%
𝐷1 𝐷2 𝐷3 𝐷4 +𝑃4 9 7 5.75 2.55+48.45

P0 = + + + = + + + = $53.12
1+𝑟 (1+𝑟)2 (1+𝑟)3 (1+𝑟)4 1.1 1.12 1.13 1.14
Q15.
D0 = $3.24
g1 = 20%, g2 = 5%
r = 11%
𝐷3 (1+𝑔) 𝐷0 (1+𝑔1)3 (1+𝑔2) 3.24(1+20%)3 (1+5%)
P3 = = = = $97.98
𝑟−𝑔 𝑟−𝑔2 11%−5%
𝐷1 𝐷2 𝐷3 𝑃3
P0 = + + +
1+𝑟 (1+𝑟)2 (1+𝑟)3 (1+𝑟)3
3.24(1+20%) 3.24(1+20%)2 3.24(1+20%)3 97.98

= + + +
1.11 1.112 1.113 1.113
= $83.02
Q19.
The $4 dividend is the same every year in perpetuity, beginning at P5
r = 4.3%
𝐷5 4.00
P4 = = = $93.02
𝑟 0.43
𝑃4 93.02
P0 = = = $78.61
(1+𝑟)4 1.0434
Q24.
D0 = 𝐷−4 x (1+𝑔1 ) = 2.10 = 1.65 x (1 + 𝑔1 )4 => 𝑔1 = 6.21%
Next five years also have 𝑔1 = 6.21%

𝑔2 = 5%
𝐷7 = 𝐷0 (1 + 𝑔1 )5 (1 + 𝑔2 )2 = 2.1 x (1.0621)5 x (1,05)2 = $3.13

Q27.
Debt: $64,000,000
Cash: $23,000,000
Number of shares: $1,950,000
Sales: $48,000,000
Costs: $15,000,000
EV/EBITDA multiple = 6.4
EBITDA = Sales – Costs = $48,000,000 – 15,000,000 = $33,000,000
EV = EBITDA x EV/EBITDA multiple = 33,000,000 x 6.4 = $211,200,000
Equity value = EV – Debt + Cash = 211,200,000 – 64,000,000 + 23,000,000

Equity value = $170,200,000
Equity value 170,200,000

Stock price = = = $87.28 per share
𝑆ℎ𝑎𝑟𝑒𝑠 𝑜𝑢𝑡𝑠𝑡𝑎𝑛𝑑𝑖𝑛𝑔 1,950,000
Q28.
Year 1 Year 2 Year 3 Year 4 Year 5 Year 6
(g=14%) (g=12%) (g=10%) (g=8%) (g=6%)
Sales (1) $115,000, $131,100, $146,832, $161,515, $174,436, $184,902,
000 000 000 200 416 601
Costs (2) 67,000,00 76,380,00 85,545,60 94,100,16 101,628,1 107,725,8
0 0 0 0 73 63
EBITDA $48,000,0 $54,720,0 $61,286,4 $67,415,0 $72,808,2 $77,176,7
(3) = (1) - (2) 00 00 00 40 43 38
Taxes 10,080,00 11,491,20 12,870,14 14,157,15 15,289,73 16,207,11
(4) = (3)x21% 0 0 4 8 1 5
Net income $37,920,0 $43,228,8 $48,416,2 $53,257,8 $57,518,5 $60,969,6
(5) = (3) – (4) 00 00 56 82 12 23
Investment 12,000,00 13,680,00 15,321,60 16,853,76 18,202,06 19,294,18
(6) 0 0 0 0 1 4
Cash Flow $25,920,0 $29,548,8 $33,094,6 $36,404,1 $39,316,4 $41,675,4
(7) = (5) – (6) 00 00 56 22 51 38
𝐶𝐹7 1+𝑔6 1 + 0.06

a/ 𝑃6 = = 𝐶𝐹6 𝑥 = 41,675,438 𝑥 = $631,085,210
𝑟−𝑔6 𝑟−𝑔6 0.13 – 0.06
𝐶𝐹1 𝐶𝐹2 𝐶𝐹3 𝐶𝐹4 𝐶𝐹5 𝐶𝐹6 +𝑃6
Company value today = 𝑃0 = + (1+𝑟)2
+ (1+𝑟)3
+ (1+𝑟)4
+ (1+𝑟)5
+ (1+𝑟)6
1+𝑟
25,920,000 29,548,800 33,094,656 36,404,122 39,316,451
= + 2
+ + +
1.13 1.13 1.133 1.134 1.135
41,675,438 + 631,085,210
+
1.136
= $435,821,483
Company value today 435,821,483
Share price = = = $79.24
b/ 𝑃6 = PE multiple x net income6 = 11 x 60,969,623 = $670,665,851

𝐶𝐹1 𝐶𝐹2 𝐶𝐹3 𝐶𝐹4 𝐶𝐹5 𝐶𝐹6 +𝑃6
Company value today = 𝑃0 = + (1+𝑟)2
+ (1+𝑟)3
+ (1+𝑟)4
+ (1+𝑟)5
+ (1+𝑟)6
1+𝑟
25,920,000 29,548,800 33,094,656 36,404,122 39,316,451
= + 2
+ + +
1.13 1.13 1.133 1.134 1.135
41,675,438 + 670,665,851
+
1.136
= $454,832,798
Company value today 454,832,798

Share price = = = $82.70

ExercisesChapter9

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ExercisesChapter9

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Exercises Chapter 9

The stock prices in 3 years will be:

The stock prices in 15 years will be:

Dividend yield and capital gains yield are equal, so:

Next year’s earnings = current earnings x (1 + g)

𝐷1 = $9, 𝐷2 = $7, 𝐷3 = $5.75, 𝐷4 = $2.55

𝐷1 𝐷2 𝐷3 𝐷4 +𝑃4 9 7 5.75 2.55+48.45

3.24(1+20%) 3.24(1+20%)2 3.24(1+20%)3 97.98

Next five years also have 𝑔1 = 6.21%

𝐷7 = 𝐷0 (1 + 𝑔1 )5 (1 + 𝑔2 )2 = 2.1 x (1.0621)5 x (1,05)2 = $3.13

EBITDA = Sales – Costs = $48,000,000 – 15,000,000 = $33,000,000

EV = EBITDA x EV/EBITDA multiple = 33,000,000 x 6.4 = $211,200,000

Equity value = EV – Debt + Cash = 211,200,000 – 64,000,000 + 23,000,000

Equity value 170,200,000

𝐶𝐹7 1+𝑔6 1 + 0.06

b/ 𝑃6 = PE multiple x net income6 = 11 x 60,969,623 = $670,665,851

Company value today 454,832,798

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