d. Assume that Temp Force is a constant growth company whose last dividend (D0, which was paid yesterday) was $2.00 and whose dividend is expected to grow indefinitely at a 6% rate. d. 1. What is the firm’s current stock price? Answer: We extend the time line on out forever, find the value of Temp Force’s dividends for every year on out into the future, and then the PV of each dividend, discounted at r = 13%. For example, the PV of D1 is $1.76106; the PV of D2 is $1.75973; and so forth. Note that the dividend payments increase with time, but as long as rs > g, the present values decrease with time. If we extended the graph on out forever and then summed the PVs of the dividends, we would have the value of the stock. However, since the stock is growing at a constant rate, its value can be estimated using the constant growth model: = D1 = D0 (1+g) = $2.00 (1.06) = $2.12 = = = = $30.29. d. 2. What is the stock’s expected value one year from now? Answer: After one year, D1 will have been paid, so the expected dividend stream will then be D2, D3, D4, and so on. Thus, the expected value one year from now is $32.10: = D2 = D1 (1+g) = $2.12(1.06) = 2.2472 = = = = $32.10.
d. Assume that Temp Force is a constant growth company whose last dividend (D0, which was paid yesterday) was $2.00 and whose dividend is expected to grow indefinitely at a 6% rate. d. 1. What is the firm’s current stock price? Answer: We extend the time line on out forever, find the value of Temp Force’s dividends for every year on out into the future, and then the PV of each dividend, discounted at r = 13%. For example, the PV of D1 is $1.76106; the PV of D2 is $1.75973; and so forth. Note that the dividend payments increase with time, but as long as rs > g, the present values decrease with time. If we extended the graph on out forever and then summed the PVs of the dividends, we would have the value of the stock. However, since the stock is growing at a constant rate, its value can be estimated using the constant growth model: = D1 = D0 (1+g) = $2.00 (1.06) = $2.12 = = = = $30.29. d. 2. What is the stock’s expected value one year from now? Answer: After one year, D1 will have been paid, so the expected dividend stream will then be D2, D3, D4, and so on. Thus, the expected value one year from now is $32.10: = D2 = D1 (1+g) = $2.12(1.06) = 2.2472 = = = = $32.10.
BE%20Ch7%20MiniC%20Sols_%20FM14_IM.docx