Question

Using DDM, calculate the implied return on equity:

D0=$2.00, g=6%, P0=$40

D0=$8.00, g=-5%, P0=$100

D1=$1.00, g=4%, P0=$12.50

D1=$5.00, g=-6%, P0=$40

D1=$2.00, g=0%, P0=$20

Answer 1

	P0 =	Price of Share
	D1 =	Current Dividend
	Ke =	Cost of Equity
	g =	growth rate
a)	P0 =	D1 / (Ke - g)
	40 =	2.12 / (Ke- 6%)
	Ke - 6% =	2.12 / 40
	Ke - 6% =	0.053
	Ke =	5.3% + 6%
	Ke =	11.30%
	D1 =	D0 * (1 + g)
	D1 =	2 * (1 + 6.00%)
	D1 =	2.12
b)	P0 =	D1 / (Ke - g)
	100 =	7.60 / (Ke + 5%)
	Ke + 5% =	7.60 / 100
	Ke =	7.6% - 5%
	Ke =	2.60%
	D1 =	D0 * (1 + g)
	D1 =	8 * (1 - 5.00%)
	D1 =	7.60
c)	P0 =	D1 / (Ke - g)
	12.50 =	1 / (Ke - 4%)
	Ke - 4% =	1 / 12.50
	Ke - 4% =	8%
	Ke =	12.00%
d)	P0 =	D1 / (Ke - g)
	40 =	5 / (Ke + 6%)
	Ke + 6% =	5 / 40
	Ke + 6% =	12.50%
	Ke =	6.50%
e)	P0 =	D1 / (Ke - g)
	20 =	2 / (Ke - 0%)
	Ke =	2 / 20
	Ke =	10.00%