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Financial Analysis Spreadsheet Templates
MAIN MENU -- CHAPTER 8
Problem 8-4 Problem 8-12 Problem 8-6 Problem 8-19 Problem 8-9 Problem 8-21
Fundamentals of Corporate Finance by Ross, Westerfield, and Jordan -- Fifth Edition Copyright © 2000 Irwin/McGraw-Hill and KMT Software, Inc. (www.kmt.com)
File: d98d7d2f-1fae-4225-bb84-901ad0bbb9c9.xls Copyright © 1997 Richard D. Irwin, Inc.
Printed: 8/11/2008
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File: d98d7d2f-1fae-4225-bb84-901ad0bbb9c9.xls Copyright © 1997 Richard D. Irwin, Inc.
Printed: 8/11/2008
Fundamentals of Corporate Finance
Ross, Westerfield, and Jordan -- Fifth Edition
Problem 8-4 Objective Calculate stock value (per share). Student Name: Course Name: Student ID: Course Number: Madonna Corporation will pay a $4.00 per share dividend next year. The company pledges to increase its dividend by 3 percent per year, indefinitely. If you require a 14 percent return on your investment, how much will you pay for the company's stock today?
Solution
Instructions Enter the dividend per share, growth rate of dividend and required return on investment to calculate the stock value per share. Dividend per share Growth rate of dividend Required return on investment Stock value per share
#DIV/0!
Problem: 8-4
Copyright © 1997 Richard D. Irwin, Inc.
Printed: 8/11/2008
Fundamentals of Corporate Finance
Ross, Westerfield, and Jordan -- Fifth Edition
Problem 8-6 Objective Understand the relationship between expected return, projected dividends, and stock value. Student Name: Course Name: Student ID: Course Number: Suppose you know that a company's stock currently sells for $60 per share and the required return on the stock is 16%. You also know that the total return on the stock is evenly divided between a capital gains yield and a dividend yield. If it's the company's policy to always maintain a constant growth rate in its dividends, what is the current dividend per share?
Solution
Instructions Enter the current dividend yield and stock price.
Current dividend yield Stock Price Projected dividend Current dividend
FORMULA $0.00 $0.00
File: d98d7d2f-1fae-4225-bb84-901ad0bbb9c9.xls
Copyright © 1997 Richard D. Irwin, Inc.
Printed: 8/11/2008
Fundamentals of Corporate Finance
Ross, Westerfield, and Jordan -- Fifth Edition
Problem 8-9 Objective Calculate the value per share of stock when the growth of dividends is nonconstant. Student Name: Course Name: Student ID: Course Number: Smashed Pumpkin Farms (SPF) just paid a dividend of $4.50 on its stock. The growth rate in dividends is expected to be a constant 7.5 percent per year, indefinitely. Investors require an 20% return on the stock for the next three years, an 11 percent return for the next three years, and then a 12 percent return, thereafter. What is the current share price for SPF stock?
Solution
Instructions Enter the dividend growth rate and the required returns for the three investment holding periods below. Then enter the formulas to calculate the present value of the stock. Dividend growth rate Period 1 (next three years) required return Period 2 (three years) required return Period 3 (indefinitely) required return Projected Dividends Year Dividends 0 $4.50 1 $4.50 2 $4.50 3 $4.50 4 $4.50 5 $4.50 6 $4.50 7 $4.50
Year 6 Projected Stock Value Year 3 Projected Stock Value Year 0 Projected Stock Value
FORMULA FORMULA FORMULA
File: d98d7d2f-1fae-4225-bb84-901ad0bbb9c9.xls
Copyright © 1997 Richard D. Irwin, Inc.
Printed: 8/11/2008
Fundamentals of Corporate Finance
Ross, Westerfield, and Jordan -- Fifth Edition
Problem 8-12 Objective Calculate the value per share of stock when the growth of dividends is nonconstant. Student Name: Course Name: Student ID: Course Number: South Park Corporation is expected to pay the following dividends over the next four years: $4.75, $3, $2, and $1. Afterwards, the company pledges to maintain a constant 9 percent growth rate in dividends, forever. If the required return on the stock is 16 percent, what is the current price per share?
Solution
Instructions With the projected stock value in year 4 already calculated for you, enter the formula to find the current stock value. Dividend growth rate Required return on stock 9% 16% Projected Dividends $4.75 $3.00 $2.00 $1.00 $16.57 FORMULA
Year 1 2 3 4 Projected Stock Value in Year 4 Current Stock Value
What-if Analysis
Instructions Click one of the scenario buttons to see the "what if" question. With each scenario, refer back to the original data of the problem. Solve the scenario question by utilizing the stock valuation template given below. Be sure to print your results before moving on to the next scenario.
What-if: Dividend growth rate =
(Scenario 1) 10%
Student's "What-if" Solution
Scenario 1 Dividend growth rate Required return on stock Projected Dividends $4.75 $3.00 $2.00 $1.00 #DIV/0! FORMULA
Year 1 2 3 4 Projected Stock Value in Year 4 Current Stock Value Scenario 2 Dividend growth rate Required return on stock
Year 1 2 3 4 Projected Stock Value in Year 4 Current Stock Value
Projected Dividends $4.75 $3.00 $2.00 $1.00 #DIV/0! FORMULA
File: d98d7d2f-1fae-4225-bb84-901ad0bbb9c9.xls
Copyright © 1997 Richard D. Irwin, Inc.
Printed: 8/11/2008
Fundamentals of Corporate Finance
Ross, Westerfield, and Jordan -- Fifth Edition
Problem 8-19 Objective Calculate stock yields. Student Name: Course Name: Student ID: Course Number: Consider four different stocks, all of which have a required return of 20 percent and a most recent dividend of $3.75 per share. Stocks W, X, and Y are expected to maintain constant growth rates in dividends for the foreseeable future of: Stock W Stock X Stock Y 10% 0% -5%
Those rates are per year. Stock Z is a growth stock that will increase its dividend by 20 percent for the next two years and then maintain a constant 12 percent growth rate, thereafter. What is the dividend yield for each of these four stocks? What is the expected capital gains yield? Discuss the relationship among the various returns that you find for each of these stocks.
Solution
Instructions Enter formulas to calculate current price and dividend yield. Current Dividend Required Return Stock Name Stock W Stock X Stock Y Stock Z $3.75 20% Price Dividend Yield Cap Gains Yld FORMULA FORMULA 20% FORMULA FORMULA 20% FORMULA FORMULA 20% FORMULA FORMULA 20%
Stock Z Value Calculation P2 Value $75.60 P0 Value FORMULA
File: d98d7d2f-1fae-4225-bb84-901ad0bbb9c9.xls
Copyright © 1997 Richard D. Irwin, Inc.
Printed: 8/11/2008
Fundamentals of Corporate Finance
Ross, Westerfield, and Jordan -- Fifth Edition
Problem 8-21 Objective Calculate the value of stock using a nonconstant growth assumption. Student Name: Course Name: Student ID: Course Number: Mummeball Company just paid a dividend of $3.50 per share. The company will increase its dividend by 15 percent next year and will then reduce its dividend growth rate by 5 percentage points per year until it reaches the industry average of 5 percent, after which the company will keep a constant growth rate, forever. If the required return on Mummeball stock is 13.75 percent, what will a share of stock sell for today?
Solution
Instructions Enter formulas below to calculate the current stock price Current dividend Year 1 Dividend growth rate Year 2 Dividend growth rate Year 3 Dividend growth rate Required Return $3.50 15% 10% 5% 13.75% Projected Dividends $4.03 $4.43 $4.65
Year 1 2 3
Calculation of Current Price Present Value of Year 1 Dividend FORMULA Present Value of Year 2 Dividend FORMULA Present Value of Year 3 Price FORMULA Stock Price $0.00
File: d98d7d2f-1fae-4225-bb84-901ad0bbb9c9.xls
Copyright © 1997 Richard D. Irwin, Inc.
Printed: 8/11/2008