Problem solutions to ch 8

LG3 8-1 Stock Index Performance On October 9, 2007, the Dow Jones Industrial Average set a new high. The index closed at 14,164.53, which was up 120.80 that day. What was the return (in percent) of the stock market that day?

FV = PV × (1 + i)
14,164.53 = (14,164.53 - 120.80) × (1 + i) i = (14,164.53 / 14,043.73) - 1 = 0.86%

LG3 8-2 Stock Index Performance On March 9, 2009, the Dow Jones Industrial Average reached a new low. The index closed at 6,547.05, which was down 79.89 that day. What was the return (in percent) of the stock market that day?

FV = PV × (1 + i)
6,547.05 = (6,547.05 + 79.89) × (1 + i) i = (6,547.05 / 6,626.94) - 1 = -1.21%

LG4 8-3 Buying Stock with …show more content…
The dividend is expected to grow at a 14.5 percent rate. At a current stock price of $44.12, what is the return shareholders are expecting?

First convert D0 to D1: $0.46 × (1 + 0.145) = $0.5267.

Then use equation 8-7:

LG5 8-22 Expected Return Paychex Inc. (PAYX) recently paid an $0.84 dividend. The dividend is expected to grow at a 15 percent rate. At a current stock price of $40.11, what is the return shareholders are expecting?

First convert D0 to D1: $0.84 × (1 + 0.15) = $0.966.

Then use equation 8-7:

LG6 8-23 Dividend Initiation and Stock Value A firm does not pay a dividend. It is expected to pay its first dividend of $0.20 per share in three years. This dividend will grow at 11 percent indefinitely. Using a 12 percent discount rate, compute the value of this stock.

First compute the year 2 value of the stock using equation 8-6 and then discount this back two years to get the present value of the stock price:

LG6 8-24 Dividend Initiation and Stock Value A firm does not pay a dividend. It is expected to pay its first dividend of $0.25 per share in two years. This dividend will grow at 10 percent indefinitely. Using an 11.5 percent discount rate, compute the value of this stock.

First compute the year 1 value of the stock using equation 8-6 and then discount this back one year to get the present value of the stock price:

LG7 8-25 P/E Ratio Model and Future Price Kellogg Co. (K) recently earned a profit of $2.52 per