Problems
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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.