Question

Compute the required values under the following circumstances: (Do not round intermediate calculations. Round the final answers to 2 decimal places.)

a. D₁ = $4.60; P₀ = $60; g = 6%; F = $4.00.

Ke	%
Kn	%

b. D₁ = $0.25; P₀ = $20; g = 10%; F = $1.50.

  

Ke	%
Kn	%

c. E₁ (earnings at the end of period one) = $6; payout ratio equals 30 percent; P₀ = $25; g = 4.5%; F = $2.

  

D1	$
Ke	%
Kn	%

d. D₀ (dividend at the beginning of the first period) = $3; growth rate for dividends and earnings (g) = 7%; P₀ = $42; F = $3.00.

D1	$
Ke	%
Kn	%

Answer 1

a)
Ke = (D1 / P0) + g
= ($4.60 / $60) + 0.06
= 0.0767 + 0.06
= 0.1367 or 13.67%

Ke = 13.67%

Kn = (D1 / (P0 - F)) + g
= ($4.60 / ($60 - $4)) + 0.06
= 0.0821 + 0.06
= 14.21%

Kn = 14.21%

b)
Ke = (D1 / P0) + g
= ($0.25 / $20) + 0.10
= 0.0125 + 0.10
= 11.25%

Ke = 11.25%

Kn = (D1 / (P0 - F)) + g
= ($0.25 / ($20- $1.50)) + 0.10
= 0.0135 + 0.10
= 11.35%

Kn = 11.35%

c)
D1 = E1 * payout ratio
= $6 * 30%
= $1.80

Ke = (D1 / P0) + g
= ($1.80 / $25) + 0.045
= 0.072 + 0.045
= 11.70%

Kn = (D1 / (P0 - F)) + g
= ($1.80 / ($25 - $2)) + 0.045
= 0.0783 + 0.045
= 12.33%

d)
D1 = D0 * (1+g)
= $3 * (1 + 7%)
= $3.21

Ke = (D1 / P0) + g
= ($3.21 / $42) + 0.07
= 0.0764 + 0.07
= 14.64%

Kn = (D1 / (P0 - F)) + g
= ($3.21 / ($42 - $3)) + 0.07
= 0.0823 + 0.07
= 15.23%