FUNDAMENTALS OF CORP.FIN.(LL)-W/CONNECT
FUNDAMENTALS OF CORP.FIN.(LL)-W/CONNECT
10th Edition
ISBN: 9781260848670
Author: BREALEY
Publisher: MCG
Question
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Chapter 7, Problem 12QP

a.

Summary Introduction

To determine: The expected dividends for year 1, 2 and 3.

a.

Expert Solution
Check Mark

Answer to Problem 12QP

The expected dividends for year 1 are $1.04, year 2 are $1.08 and year 3 are $1.12.

Explanation of Solution

Determine the expected dividends for year 1, 2 and 3

Dividends(D1)=[CurrentDividends(D0)×(1+GrowthRate(g))]=[$1×(1+4%)]=$1.04Dividends(D2)=[CurrentDividends(D1)×(1+GrowthRate(g))]=[$1.04×(1+4%)]=$1.0816or$1.08Dividends(D3)=[CurrentDividends(D2)×(1+GrowthRate(g))]=[$1.0816×(1+4%)]=$1.124864or$1.12

Therefore, the expected dividends for year 1 are $1.04, year 2 are $1.08 and year 3 are $1.12.

b.

Summary Introduction

To determine: The selling price of stock.

b.

Expert Solution
Check Mark

Answer to Problem 12QP

The selling price of stockis $13.

Explanation of Solution

Determine the selling price of stock

ValueofStock(P0)=[CurrentDividends(D0)RequiredReturn(r)GrowthRate(g)]=[$1.0412%4%]=$13

Therefore, the selling price of stockis $13.

c.

Summary Introduction

To determine: The projected stock price three years from now.

c.

Expert Solution
Check Mark

Answer to Problem 12QP

The projected stock price three years from nowis $14.62.

Explanation of Solution

Determine the projected stock price three years from now

ExpectedStockPrice(P0)=[CurrentDividends(D3)×(1+GrowthRate(g))RequiredReturn(r)GrowthRate(g)]=[$1.124864×(1+4%)12%4%]=$14.623232or$14.62

Therefore, the projected stock price three years from nowis $14.62.

d.

Summary Introduction

To determine: The projectedcash flows for years 1, 2 and 3.

d.

Expert Solution
Check Mark

Answer to Problem 12QP

The projectedcash flows for years 1 are $1.04, year 2 are $1.08 and year 3 are $15.75.

Explanation of Solution

Determine the projected cash flows for years 1, 2 and 3

The cash flows for year 1 and 2 will remain same as $1.04 and $1.08 respectively since the purchase happens only in year 3. The cash flow for year 3 is calculated below,

CashFlowYear3=[CurrentDividends(D3)+ExpectedStockPrice(P0)]=[$1.124864+$14.623232]=$15.748096or$15.75

Therefore, the cash flows for year 3 is $15.75.

e.

Summary Introduction

To determine: The present value of stream of payments.

e.

Expert Solution
Check Mark

Answer to Problem 12QP

The present value of stream of payments for year 1 are $0.93, year 2 are $0.86 and year 3 are $11.21.

Explanation of Solution

Determine the cash flows for year 1, 2 and 3

Excel Spreadsheet:

FUNDAMENTALS OF CORP.FIN.(LL)-W/CONNECT, Chapter 7, Problem 12QP , additional homework tip  1

Excel Workings:

FUNDAMENTALS OF CORP.FIN.(LL)-W/CONNECT, Chapter 7, Problem 12QP , additional homework tip  2

Therefore, the present value of stream of payments for year 1 are $0.93, year 2 are $0.86 and year 3 are $11.21.

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