FINC 439
Beatrice Peabody

1:A)Price= .60/(.0836-.0550)=20.99 B) Dividends per share are expected to grow at a constant rate forever is the condition when using the constant growth model. Real world stocks do not satisfy the constant growth assumptions because it is not realistic to assume that you grow your business constantly at the same rate each year.
2:A) Expected Return=(.60/27)+5.5=7.72% Expected Dividend Yield= .60/27.00=2.22% Expected Capital Gains Yield= growth rate=5.5%
When comparing the two expected returns, the return has decreased and the stock price has increased. This is a usual indication that the value of the stock has gone up which would indicate that it is less risky.
B) The relationship is that they both grow at a constant rate and remain that way overtime
3:A) The value of this company’s stock is 34.58, which we calculated in excel
B) 37.27 which is our stock value calculated at the end of year 1996
C) Dividend Yield=.60/34.58=1.74% which was calculated in excel
Capital Gains Yield= 7.76%
Total Yield=9.5%
Overtime the Dividend Yield decreases as the Capital Gains yield increases. When the growth rate becomes constant the dividend yield becomes constant as well.
4) Question 2 Initial return= 7.72% G=(10.5)/2=5.25 Expected Return= .60/27=2.22+5.25= 7.47%
The growth rate got smaller from 5.5 to 5.25, which would indicate that the expected return will decrease as well.

5) Required return= 6.40%+ 6.2%=13.84%
The return is much higher compared to the return found in question 2. This shows that the models are not consistent with each other.
6:A) Nominal Return= 3.38/43.50=7.77%
EAR= 3.38/4=.845 7.77/4=1.94 EAR= (1+.0194)^4-1=8.00%
B) Number of years= .2*(1)+.2*(2)+.2*(3)+.2*(4)+.2*(5)=3 years *4=12
Pmt=.845 Rate=9.76/4 Plug into calculator and the price is