The current stock price according to DDM is to be determined when year-end dividend is $8 and the market capitalization rate is 10% per year. Introduction: The stock price is defined as the expected cash flow from the stock which is provided at discounted value at required rate of return . The return on equity (ROE) can be defined as the return which is generated by the company’s operation for its equity holder. The constant growth Discount Dividend Model (DDM) represents that the dividends grow at fixed percentage annually. This model is safe and helpful for the very mature companies which have history of regular dividends payment.

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Answer 1

Question

Chapter 18, Problem 11PS

A

Summary Introduction

To calculate: The current stock price according to DDM is to be determined when year-end dividend is $8 and the market capitalization rate is 10% per year.

Introduction: The stock price is defined as the expected cash flow from the stock which is provided at discounted value at required rate of return.

The return on equity (ROE) can be defined as the return which is generated by the company’s operation for its equity holder.

The constant growth Discount Dividend Model (DDM) represents that the dividends grow at fixed percentage annually. This model is safe and helpful for the very mature companies which have history of regular dividends payment.

B

Summary Introduction

To calculate: The implied value of ROE on future investment opportunities when expected earnings per share are $12.

Introduction: The stock price is defined as the expected cash flow from the stock which is provided at discounted value at required rate of return.

The return on equity (ROE) can be defined as the return which is generated by the company’s operation for its equity holder.

The constant growth Discount Dividend Model (DDM) represents that the dividends grow at fixed percentage annually. This model is safe and helpful for the very mature companies which have history of regular dividends payment.

C

Summary Introduction

To calculate: The amount market paying per share for growth opportunities is to be determined.

Introduction: The stock price is defined as the expected cash flow from the stock which is provided at discounted value at required rate of return.

The return on equity (ROE) can be defined as the return which is generated by the company’s operation for its equity holder.

The constant growth Discount Dividend Model (DDM) represents that the dividends grow at fixed percentage annually. This model is safe and helpful for the very mature companies which have history of regular dividends payment.

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Esfandairi Enterprises is considering a new three-year expansion project that requires an initial fixed asset investment of $2,350,000. The fixed asset will be depreciated straight-line to zero over its three-year tax life, after which time it will be worthless. The project is estimated to generate $3,310,000 in annual sales, with costs of $2,330,000. Assume the tax rate is 23 percent and the required return on the project is 11 percent. What is the project's NPV? Note: A negative answer should be indicated by a minus sign. Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.

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Answer 2

Question

Chapter 18, Problem 11PS

A

Summary Introduction

To calculate: The current stock price according to DDM is to be determined when year-end dividend is $8 and the market capitalization rate is 10% per year.

Introduction: The stock price is defined as the expected cash flow from the stock which is provided at discounted value at required rate of return.

The return on equity (ROE) can be defined as the return which is generated by the company’s operation for its equity holder.

The constant growth Discount Dividend Model (DDM) represents that the dividends grow at fixed percentage annually. This model is safe and helpful for the very mature companies which have history of regular dividends payment.

B

Summary Introduction

To calculate: The implied value of ROE on future investment opportunities when expected earnings per share are $12.

Introduction: The stock price is defined as the expected cash flow from the stock which is provided at discounted value at required rate of return.

The return on equity (ROE) can be defined as the return which is generated by the company’s operation for its equity holder.

The constant growth Discount Dividend Model (DDM) represents that the dividends grow at fixed percentage annually. This model is safe and helpful for the very mature companies which have history of regular dividends payment.

C

Summary Introduction

To calculate: The amount market paying per share for growth opportunities is to be determined.

Introduction: The stock price is defined as the expected cash flow from the stock which is provided at discounted value at required rate of return.

The return on equity (ROE) can be defined as the return which is generated by the company’s operation for its equity holder.

The constant growth Discount Dividend Model (DDM) represents that the dividends grow at fixed percentage annually. This model is safe and helpful for the very mature companies which have history of regular dividends payment.

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Answer 3

Question

Chapter 18, Problem 11PS

A

Summary Introduction

To calculate: The current stock price according to DDM is to be determined when year-end dividend is $8 and the market capitalization rate is 10% per year.

Introduction: The stock price is defined as the expected cash flow from the stock which is provided at discounted value at required rate of return.

The return on equity (ROE) can be defined as the return which is generated by the company’s operation for its equity holder.

The constant growth Discount Dividend Model (DDM) represents that the dividends grow at fixed percentage annually. This model is safe and helpful for the very mature companies which have history of regular dividends payment.

B

Summary Introduction

To calculate: The implied value of ROE on future investment opportunities when expected earnings per share are $12.

Introduction: The stock price is defined as the expected cash flow from the stock which is provided at discounted value at required rate of return.

The return on equity (ROE) can be defined as the return which is generated by the company’s operation for its equity holder.

The constant growth Discount Dividend Model (DDM) represents that the dividends grow at fixed percentage annually. This model is safe and helpful for the very mature companies which have history of regular dividends payment.

C

Summary Introduction

To calculate: The amount market paying per share for growth opportunities is to be determined.

Introduction: The stock price is defined as the expected cash flow from the stock which is provided at discounted value at required rate of return.

The return on equity (ROE) can be defined as the return which is generated by the company’s operation for its equity holder.

The constant growth Discount Dividend Model (DDM) represents that the dividends grow at fixed percentage annually. This model is safe and helpful for the very mature companies which have history of regular dividends payment.

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Answer 4

Question

Chapter 18, Problem 11PS

A

Summary Introduction

To calculate: The current stock price according to DDM is to be determined when year-end dividend is $8 and the market capitalization rate is 10% per year.

Introduction: The stock price is defined as the expected cash flow from the stock which is provided at discounted value at required rate of return.

The return on equity (ROE) can be defined as the return which is generated by the company’s operation for its equity holder.

The constant growth Discount Dividend Model (DDM) represents that the dividends grow at fixed percentage annually. This model is safe and helpful for the very mature companies which have history of regular dividends payment.

B

Summary Introduction

To calculate: The implied value of ROE on future investment opportunities when expected earnings per share are $12.

Introduction: The stock price is defined as the expected cash flow from the stock which is provided at discounted value at required rate of return.

The return on equity (ROE) can be defined as the return which is generated by the company’s operation for its equity holder.

The constant growth Discount Dividend Model (DDM) represents that the dividends grow at fixed percentage annually. This model is safe and helpful for the very mature companies which have history of regular dividends payment.

C

Summary Introduction

To calculate: The amount market paying per share for growth opportunities is to be determined.

Introduction: The stock price is defined as the expected cash flow from the stock which is provided at discounted value at required rate of return.

The return on equity (ROE) can be defined as the return which is generated by the company’s operation for its equity holder.

The constant growth Discount Dividend Model (DDM) represents that the dividends grow at fixed percentage annually. This model is safe and helpful for the very mature companies which have history of regular dividends payment.

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Answer 5

Chapter 18, Problem 11PS

A

Summary Introduction

To calculate: The current stock price according to DDM is to be determined when year-end dividend is $8 and the market capitalization rate is 10% per year.

Introduction: The stock price is defined as the expected cash flow from the stock which is provided at discounted value at required rate of return.

The return on equity (ROE) can be defined as the return which is generated by the company’s operation for its equity holder.

The constant growth Discount Dividend Model (DDM) represents that the dividends grow at fixed percentage annually. This model is safe and helpful for the very mature companies which have history of regular dividends payment.

B

Summary Introduction

To calculate: The implied value of ROE on future investment opportunities when expected earnings per share are $12.

Introduction: The stock price is defined as the expected cash flow from the stock which is provided at discounted value at required rate of return.

The return on equity (ROE) can be defined as the return which is generated by the company’s operation for its equity holder.

The constant growth Discount Dividend Model (DDM) represents that the dividends grow at fixed percentage annually. This model is safe and helpful for the very mature companies which have history of regular dividends payment.

C

Summary Introduction

To calculate: The amount market paying per share for growth opportunities is to be determined.

Introduction: The stock price is defined as the expected cash flow from the stock which is provided at discounted value at required rate of return.

The return on equity (ROE) can be defined as the return which is generated by the company’s operation for its equity holder.

The constant growth Discount Dividend Model (DDM) represents that the dividends grow at fixed percentage annually. This model is safe and helpful for the very mature companies which have history of regular dividends payment.

Answer 6

Chapter 18, Problem 11PS

A

Summary Introduction

To calculate: The current stock price according to DDM is to be determined when year-end dividend is $8 and the market capitalization rate is 10% per year.

Introduction: The stock price is defined as the expected cash flow from the stock which is provided at discounted value at required rate of return.

The return on equity (ROE) can be defined as the return which is generated by the company’s operation for its equity holder.

The constant growth Discount Dividend Model (DDM) represents that the dividends grow at fixed percentage annually. This model is safe and helpful for the very mature companies which have history of regular dividends payment.

Answer 7

Chapter 18, Problem 11PS

A

Summary Introduction

To calculate: The current stock price according to DDM is to be determined when year-end dividend is $8 and the market capitalization rate is 10% per year.

Introduction: The stock price is defined as the expected cash flow from the stock which is provided at discounted value at required rate of return.

The return on equity (ROE) can be defined as the return which is generated by the company’s operation for its equity holder.

The constant growth Discount Dividend Model (DDM) represents that the dividends grow at fixed percentage annually. This model is safe and helpful for the very mature companies which have history of regular dividends payment.

Answer 8

B

Summary Introduction

To calculate: The implied value of ROE on future investment opportunities when expected earnings per share are $12.

Introduction: The stock price is defined as the expected cash flow from the stock which is provided at discounted value at required rate of return.

The return on equity (ROE) can be defined as the return which is generated by the company’s operation for its equity holder.

The constant growth Discount Dividend Model (DDM) represents that the dividends grow at fixed percentage annually. This model is safe and helpful for the very mature companies which have history of regular dividends payment.

Answer 9

B

Summary Introduction

To calculate: The implied value of ROE on future investment opportunities when expected earnings per share are $12.

Introduction: The stock price is defined as the expected cash flow from the stock which is provided at discounted value at required rate of return.

The return on equity (ROE) can be defined as the return which is generated by the company’s operation for its equity holder.

The constant growth Discount Dividend Model (DDM) represents that the dividends grow at fixed percentage annually. This model is safe and helpful for the very mature companies which have history of regular dividends payment.

Answer 10

C

Summary Introduction

To calculate: The amount market paying per share for growth opportunities is to be determined.

Introduction: The stock price is defined as the expected cash flow from the stock which is provided at discounted value at required rate of return.

The return on equity (ROE) can be defined as the return which is generated by the company’s operation for its equity holder.

The constant growth Discount Dividend Model (DDM) represents that the dividends grow at fixed percentage annually. This model is safe and helpful for the very mature companies which have history of regular dividends payment.

Answer 11

C

Summary Introduction

To calculate: The amount market paying per share for growth opportunities is to be determined.

Introduction: The stock price is defined as the expected cash flow from the stock which is provided at discounted value at required rate of return.

The return on equity (ROE) can be defined as the return which is generated by the company’s operation for its equity holder.

The constant growth Discount Dividend Model (DDM) represents that the dividends grow at fixed percentage annually. This model is safe and helpful for the very mature companies which have history of regular dividends payment.

Answer 12

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Answer 13

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Answer 15

Ch. 18 - Prob. 1PS Ch. 18 - Prob. 2PS Ch. 18 - Prob. 3PS Ch. 18 - Prob. 4PS Ch. 18 - Prob. 5PS Ch. 18 - Prob. 6PS Ch. 18 - Prob. 7PS Ch. 18 - Prob. 8PS Ch. 18 - Prob. 9PS Ch. 18 - Prob. 10PS

Solution Summary: The author calculates the implied value of ROE on future investment opportunities when expected earnings per share are 12.

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