HW CH 9

9-2 Thomas Brothers is expected to pay a $0.50 per share dividend at the end of the year
(that is D1= $0.50) The dividend is expected to grow at a constant rate of %7 a year. The
required rate of return on the stock, Rs is 15%. What is the stock's current value per share? 

P = D/(k-g) 

P is the price of the stock 

D is the dividend 
k is the required rate of return 
g is the growth rate (g < k) 

P = 0.50/(15% - 7%) 
P = 0.50/(0.15 - 0.07) 
P = 0.50/0.08 
P = $6.25 

9-3 CONSTANT GROWTH VALUATION Harrison Clothiers’ stock currently sells for $20 00
ashare. It just paid a dividend of $1.00 a share (that is, D0 $1.00). The dividend is expectedto
grow at a constant rate of 6% a year. What stock price is expected 1 year from now? Whatis
the required rate of return?

Price expected 1 year from now=p0*(1+6%)=20*1.06=$21.2

D1=D0*(1+g)=1*1.06=$1.06

Rs=(D1/p0)+g=(1.06/20)+6%=11.3%

9-4 Hart Enterprises recently paid a dividend, D 0 of $1.25. It expects to have non-constant
growth of 20 percent for 2 years followed by a constant rate of 5percent thereafter. T he
firm’s required return is 10 percent

a) How far away is the terminal, or horizon, date?

T he terminal, or horizon, date is the date when the growth ratebecomes constant. T his
occurs at the end of Year 2.
 b) What is the firm’s horizon, or terminal, value?

c) What is the firms intrinsic value today, P0 ?

The firms intrinsic value is calculated as the sum of the present value of all dividends
during the supernormal growth period plus the present value of the terminal value.
Using your financial calculator, enter the following inputs: CF 0 = 0, CF 1 = 1.50, CF 2 =
1.80 + 37.80 = 39.60, I/YR= 10, and then solve for NPV = $34.09

9-5 Smith Technologies is expected to generate $50 million in free cash flow next year, and
FCF is expected to grow at a constant rate of 3% per year indefinitely. Smith has no debt or
preferred stock, and its WACC is 11%. If Smith has 50 million shares of stock outstanding,
what is the stock's value per share?

The firm’s free cash flows is expected to grow at a constant rate, hence we can apply a constant
formula to determine the total value of the firm:

Firm value = FCF1/(WACC – g)

Firm value = $150,000,000/(0.10 – 0.05)

Firm value = $3,000,000,000

The stock’s value per share is:

Equity value per share = Equity Value/ Shares Outstanding

Equity value per share = $3,000,000,000/50,000,000

Equity value per share = $60

9-6 PREFERRED STOCK VALUATION Fee Founders has perpetual preferred stock
outstandingthat sells for $60 a share and pays a dividend of $5 at the end of each year. What
is therequired rate of return?

Rp=Dp/Vp=5/60=8.33%