Problem 10-27 Problem 10-29 Problem 10-32
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Valuation and Rates of Return
Spreadsheet Templates
Foundations of Financial Management
MAIN MENU – CHAPTER 10
Spreadsheet Templates by Block, Hirt and Danielsen
Problem 10-27
Objective: Common stock value
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Stagnant Iron and Steel currently pays a $4.20 annual cash dividend (D0). It plans to maintain the dividend at this
level for the foreseeable future as no future growth is anticipated. If the required rate of return by common
stockholders (Ke ) is 12 percent, what is the price of the common stock?
Foundations of Financial Management
Block, Hirt and Danielsen
Problem 10-27
Instructions
Enter a formula to calculate the estimated value (price) of the stock.
Information
Cash dividend $4.20
Required rate 12%
Price of stock $35.00
Solution
Problem 10-29
Objective: Common stock value under different conditions
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Ecology Labs, Inc., will pay a dividend of $3 per share in the next 12 months (D1 ). The required rate of return (Ke )
is 10 percent and the constant growth rate is 5 percent.
a. Compute P0 .
(For parts b, c, and d in this problem all variables remain the same except the one
specifically changed. Each question is independent of the others.)
b. Assume Ke, the required rate of return, goes up to 12 percent; what will be the new value of P0?
c. Assume the growth rate (g) goes up to 7 percent; what will be the new value of P0? K e goes back to its original
value of 10 percent.
d. Assume D1 is $3.50, what will be the new value of P0? Assume Ke is at its original value of 10 percent and g goes
back to its original value of 5 percent.
Foundations of Financial Management
Block, Hirt and Danielsen
Problem 10-29
Instructions
Enter formulas to calculate the requirements of this problem.
Information
Dividend per share $3.00
Required return 10%
Growth rate 5%
a. Compute P0.
P0$60.00
b. Assume Ke , the required rate of return, goes up to 12 percent; what will be the new value of P0?
New required rate of return 12%
New value for P0$42.86
c. Assume the growth rate (g) goes up to 7 percent; what will be the new value of P0?
New growth rate (g) 7%
New value for P0$100.00
d. Assume D1 is $2, what will be the new value of P0?
D1$3.50
New value for P0$70.00
Solution
Problem 10-32
Objective: Common stock required rate of return
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A firm pays a $3.80 dividend at the end of year one (D1 ), has a stock price of $50, and a constant growth rate (g)
of 4 percent. Compute the required rate of return (Ke ).
Foundations of Financial Management
Block, Hirt and Danielsen
Problem 10-32
Instructions
Enter a formula to calculate the required rate of return.
Information
Dividend (D1)$3.80
Stock price $50
Growth rate 4%
Required rate of return 11.60%
Solution