Problem Set 2 Mba 503

1122 Words Aug 30th, 2007 5 Pages
Problem Set II

Problem P9 – 17:
Jack Hammer

FV (Table 1) at 11% discount rate

2.00 x .901 = $1.80
2.20 x .802 = $1.79
2.40 x .731 = $1.75
33.00 x .731 = $24.12 -------- $29.46

Problem P9 - 22:

Alternative Present Values: Your rich godfather has offered you a choice of one of the three following alternatives: $10,000 now; $2,000 a year for eight years; or $24,000 at the end of eight years.
Solution:
(first alternative) Present value of 10,000 received now: 10,000
(second alternative) Present Value of annuity of 2,000 for eight years:
Appendix D
PVa=AxPVifa
=2,000xPVifa (11%,8years)
=2,000x5.146
=10,292
(third alternative) Present value of 24,000 received in 8 years
Appendix B
PV=
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It has a price of $110. What is the required rate of return (yield) on the preferred stock? Pp = Dp / Kp in reverse Kp = Dp / Pp Kp= 12 / 110 = .109 = 11 %
Problem P10 – 24:
Friedman Steel Company will pay a dividend of $1.50 per share in the next 12 months (D1). The required rate of return (Ke) is 10 percent and the constant growth rate is 5 percent.

For Problem 24 we computed the present value of shares of common stock with a constant growth return. Problem 24 breaks down as follows:
Po = present value of common stock with constant growth returns
Do = most recent per-share dividend, which is $1.50 in this scenario
Ke = required return or the discount rate for each year, which is 10% g = constant growth rate or rate of growth, which is 5%

A. Compute Po

Po =Do (1 + g)1 / (1 + Ke)1, [$1.50 (1 + .05)1 / (1 + .10)1 = [$1.575 / (1 + .10)1] = $1.43 (PV of expected future returns using the Discounted Cash Flow formula ("DCF") which leads to the Constant Growth formula as follows:

Answer: Po = D1 / (Ke - g), [$1.43 / (.10 - .05)] = $28.60

For parts b, c, and d in this problem all variables remain the same except the one specifically changed. Each question is independent of the others.)

B. Assume Ke, the required rate of return, goes up to 12 percent; what will be the new value of P0?

Ke = required return or the discount rate for each year, 12%

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