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
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The preferred stock price will increase
Problem P10 – 21:
Analogue Technology has preferred stock outstanding that pays an annual dividend of $12. 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

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