Question

Compute Ke and Kn under the following circumstances: a. D1 = $5.00, P0 = $70, g...

Compute Ke and Kn under the following circumstances:

a. D1 = $5.00, P0 = $70, g = 8%, F = $7.00. (Round your intermediate and final answers to 2 decimal places.)

Ke:

Kn:

b. D1 = $.22, P0 = $28, g = 7%, F = $2.50. (Round your intermediate and final answers to 2 decimal places.)

?Ke:

Kn:


c. E1 (earnings at the end of period one) = $7, payout ratio equals 40 percent, P0 = $30, g = 6.0%, F = $2.20. (Round your intermediate and final answers to 2 decimal places.)
Ke:

Kn:

d. D0 (dividend at the beginning of the first period) = $6, growth rate for dividends and earnings (g) = 7%, P0 = $60, F = $3. (Round your intermediate and final answers to 2 decimal places.)

Ke:

Kn:

Homework Answers

Answer #1

In order to solve this question, we will use Gordon model formula:

a.1. P0 = D1 / (Ke - g)

70 = 5 / (Ke - 0.07)

Ke = 5 / 70 + 0.07 = .1414

Ke = 14.14%

a. 2. P0 - F = D1 / (Kn - g)

70 - 7 = 5 / (Kn - 0.07)

Kn = 5 / 63 + 0.07 = .1494

Ke = 14.94%

b.1. P0 = D1 / (Ke - g)

28 = 0.22 / (Ke - 0.07)

Ke = .22 / 28 + 0.07 = .0779

Ke = 7.79%

b. 2. P0 - F = D1 / (Kn - g)

28 - 2.5 = .22 / (Kn - 0.07)

Kn = .22 / 25.5 + 0.07 = .0786

Ke = 7.86%

c. D1 = E1 X payout ratio = 7 X 0.40 = 2.8

c.1. P0 = D1 / (Ke - g)

30 = 2.8 / (Ke - 0.06)

Ke = 2.8 / 30 + 0.06 = .1533

Ke = 15.33%

c. 2. P0 - F = D1 / (Kn - g)

30 - 2.2 = 2.8 / (Kn - 0.06)

Kn = 2.8 / 27.8 + 0.06 = .1607

Ke = 16.07%

d.1. P0 = D0 X (1+g) / (Ke - g)

60 = 6 x (1+0.07) / (Ke - 0.07)

Ke = 6.42 / 60 + 0.07 = 0.177

Ke = 17.7%

d.2. P0 - F = D0 X (1+g) / (Ke - g)

60 - 3 = 6 x (1+0.07) / (Ke - 0.07)

Ke = 6.42 / 57 + 0.07 = 0.1826

Ke = 18.26%

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