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Skill-Building Problems.

1. Suppose that a firm has generated a real Return On Investment (Real ROI) of 14.6% and 11.9%

of the last two year, while the inflation rate as been 3.5% and 2.4%, respectively. Over the last

three years, the firm's dividends per share have increased from $15.92 to $16.23 to $17.36. Over

the next five years, the firm's Real ROI is expected to gradually slow down. The long-run forecast

calls for the firm’s Real ROI to match the firm’s real discount rate (Real k), which is 6.2% per

year. The firm follows a policy of retaining 34.0% of its earnings and paying out the rest as

dividends. Going forward, the inflation rate is expected to be 4.1% per year indefinitely.

Determine the firm’s intrinsic value / share.

2. Perform instant experiments on whether changing various inputs causes an increase or decrease in

the firm’s intrinsic value / share and by how much.

(a.) What happens when the inflation rate is increased?

(b.) What happens when the earnings retention rate is increased?

Live In-class Problems.

6. Given the partial Two Stage spreadsheet StocktwZ.xls, do steps 4 Real and Nominal Growth

Rate in Dividends, 5 Nominal Dividend / Share, 6 Date 5 Continuation Value, 7 Sum and PV

of Future Dividends and Continuation Value / Share, and 8 Intrinsic Value Per Share.

7. Given the partial Dynamic Chart spreadsheet StockdyZ.xls, complete steps 7 Enter Real

Discount Rate Values and 8 Create A Data Table To Calculate Intrinsic Value / Share.

Skill-Building Problems.

1. Suppose that a firm has generated a real Return On Investment (Real ROI) of 14.6% and 11.9%

of the last two year, while the inflation rate as been 3.5% and 2.4%, respectively. Over the last

three years, the firm's dividends per share have increased from $15.92 to $16.23 to $17.36. Over

the next five years, the firm's Real ROI is expected to gradually slow down. The long-run forecast

calls for the firm’s Real ROI to match the firm’s real discount rate (Real k), which is 6.2% per

year. The firm follows a policy of retaining 34.0% of its earnings and paying out the rest as

dividends. Going forward, the inflation rate is expected to be 4.1% per year indefinitely.

Determine the firm’s intrinsic value / share.

2. Perform instant experiments on whether changing various inputs causes an increase or decrease in

the firm’s intrinsic value / share and by how much.

(a.) What happens when the inflation rate is increased?

(b.) What happens when the earnings retention rate is increased?

Live In-class Problems.

6. Given the partial Two Stage spreadsheet StocktwZ.xls, do steps 4 Real and Nominal Growth

Rate in Dividends, 5 Nominal Dividend / Share, 6 Date 5 Continuation Value, 7 Sum and PV

of Future Dividends and Continuation Value / Share, and 8 Intrinsic Value Per Share.

7. Given the partial Dynamic Chart spreadsheet StockdyZ.xls, complete steps 7 Enter Real

Discount Rate Values and 8 Create A Data Table To Calculate Intrinsic Value / Share.