7-5 0 1 2 3 | | | | D0 = 2.00 D1 D2 D3 Step 1: Calculate the required rate of return on the stock: rs = rRF + (rM - rRF)b = 7.5% + (4%)1.2 = 12.3%. Step 2: Calculate the expected dividends: D0 = $2.00 D1 = $2.00(1.20) = $2.40 D2 = $2.00(1.20)2 = $2.88 D3 = $2.88(1.07) = $3.08 Step 3: Calculate the PV of the expected dividends: PVDiv = $2.40/(1.123) + $2.88/(1.123)2 = $2.14 + $2.28 = $4.42. Step 4: Calculate : = D3/(rs g) = $3.08/(0.123 0.07) = $58.11. – – Step 5: Calculate the PV of : PV = $58.11/(1.123)2 = $46.08. Step 6: Sum the PVs to obtain the price: stock’s = $4.42 + $46.08 = $50.50. Alternatively, using a financial calculator, input the following: CF0 = 0, CF1 = 2.40, and CF2 = 60.99 (2.88 + 58.11) and then enter I/YR = 12.3 to solve for NPV = $50.50. 7-6 Value of operations = Vop = PV of expected future free cash flow Vop = = = $6,000,000. 7-7 The growth rate in FCF from 2015 to 2016 is g = ($750.00-$707.55)/$707.50 = 0.06. HV2016 = VOp at 2016 = = $15,000.
7-5 0 1 2 3 | | | | D0 = 2.00 D1 D2 D3 Step 1: Calculate the required rate of return on the stock: rs = rRF + (rM - rRF)b = 7.5% + (4%)1.2 = 12.3%. Step 2: Calculate the expected dividends: D0 = $2.00 D1 = $2.00(1.20) = $2.40 D2 = $2.00(1.20)2 = $2.88 D3 = $2.88(1.07) = $3.08 Step 3: Calculate the PV of the expected dividends: PVDiv = $2.40/(1.123) + $2.88/(1.123)2 = $2.14 + $2.28 = $4.42. Step 4: Calculate : = D3/(rs – g) = $3.08/(0.123 – 0.07) = $58.11. Step 5: Calculate the PV of : PV = $58.11/(1.123)2 = $46.08. Step 6: Sum the PVs to obtain the stock’s price: = $4.42 + $46.08 = $50.50. Alternatively, using a financial calculator, input the following: CF0 = 0, CF1 = 2.40, and CF2 = 60.99 (2.88 + 58.11) and then enter I/YR = 12.3 to solve for NPV = $50.50. 7-6 Value of operations = Vop = PV of expected future free cash flow Vop = = = $6,000,000. 7-7 The growth rate in FCF from 2015 to 2016 is g = ($750.00-$707.55)/$707.50 = 0.06. HV2016 = VOp at 2016 = = $15,000.