Chapter 9

Problems 1-38
Input boxes in tan
Output boxes in yellow
Given data in blue
Calculations in red
Answers in green
NOTE: Some functions used in these spreadsheets may require that
the "Analysis ToolPak" or "Solver Add-in" be installed in Excel.
To install these:
1) Click the Microsoft Office Button, and then click Excel Options
2) Click Add-Ins, and then in the Manage box, select Add-ins.
3) Click Go.
4) In the Add-Ins available box, select the Solver Add-in and Analysis ToolPak check boxes, and then click OK.
5) After you load the Solver Add-in, the Solver command is available in the Analysis group on the Data tab.
4) In the Add-Ins available box, select the Solver Add-in and Analysis ToolPak check boxes, and then click OK.
5) After you load the Solver Add-in, the Solver command is available in the Analysis group on the Data tab.
Chapter 9
Question 1
Input area:
Dividend paid 2.15 $
Dividend growth rate 5%
Required return 11%
Requested year 0
Requested year 3
Requested year 15
Output area:
Price at Year 0 37.63 $
Price at Year 3 43.56 $
Price at Year 15 78.22 $
Chapter 9
Question 2
Input area:
Dividend paid 3.20 $
Dividend growth rate 6%
Stock price 63.50 $
Output area:
Required return 11.04%
Chapter 9
Question 3
Input area:
Dividend paid 3.20 $
Dividend growth rate 6%
Required return 63.50 $
Output area:
Dividend yield 5.04%
Capital gains yield 6.00%
Chapter 9
Question 4
Input area:
Dividend paid 2.65 $
Dividend growth rate 4.75%
Required return 11%
Output area:
Price 42.40 $
Chapter 9
Question 5
Input area:
Dividend growth rate 6.4%
Dividend yield 4.3%
Output area:
Required return 10.70%
Chapter 9
Question 6
Input area:
Stock price 72.00 $
Required return 11.5%
Output area:
Next year's dividend 4.14 $
Current dividend 3.91 $
Chapter 9
Question 7
Input area:
Current dividend 9.00 $
Years until dividend ceases 12
Required return 10.0%
Output area:
Share price 61.32 $
Chapter 9
Question 8
Input area:
Current dividend 5.90 $
Share price 87.00
Output area:
Required return 6.78%
Chapter 9
Question 9
Input area:
Earnings 34,000,000 $
ROE 16%
Retention ratio 80%
Output area:
Growth rate 12.80%
Next year's earnings 38,352,000 $
Chapter 9
Question 10
Input area:
EPS 1.75 $
Benchmark PE 18
Benchmark PE 21
Output area:
Stock price at PE of 18 31.50 $
Stock price at PE of 21 36.75 $
Chapter 9
Question 11
Input area:
Dividend paid 3.10 $
Dividend growth rate 6.0%
Initial required return 15%
Second required return 13%
Final required return 11%
Initial # of years 3
Second # of years 3
Output area:
Present value at beginning of final period 93.23 $
Present value at beginning of second period 74.37 $
Present value at beginning of initial period 56.82 $
Share price 56.82 $
Chapter 9
Question 12
Input area:
Future dividend 15.00 $
Dividend growth rate 5.50%
Required return 13%
Years until first dividend 10
Output area:
Share price at Year 9 200.00 $
Share price 66.58 $
Chapter 9
Question 13
Input area:
Dividend 12.00 $
Dividend growth rate 3.00
Required return 12%
Years of growth 5
Output area:
Year Dividend
1 15.00 $
2 18.00
3 21.00
4 24.00
5 27.00
6 -
7 -
8 -
9 -
10 -
Share price 73.26 $
Chapter 9
Question 14
Input area:
Dividend one 10.00 $
Dividend two 7.00
Dividend three 6.00
Dividend four 2.75
Dividend growth rate 5%
Required return 13%
Output area:
Year 4 price 36.09 $
Share price 42.31 $
Chapter 9
Question 15
Input area:
Dividend growth rate for 3 years 20%
Dividend growth rate thereafter 5%
Required return 12%
Dividend 2.80 $
Output area:
Price at end of supernormal growth 72.58 $
Share price 61.32 $
Chapter 9
Question 16
Input area:
Initial dividend growth rate 30%
Initial # of years 3
Second growth rate 18%
Second # of years 1
Final growth rate 8%
Required return 11%
Share price 65.00 $
Output area:
P
4
93.33 X D0
Share price 74.43 X D0
Current dividend 0.87 $
Next year's dividend 1.14 $
Chapter 9
Question 17
Input area:
Dividend paid 9.00 $
Dividend growth rate -4%
Required return 11%
Output area:
Price 57.60 $
Chapter 9
Question 18
Input area:
Stock price 58.32 $
Required return 11.5%
Dividend growth rate 5%
Output area:
Current dividend 3.61 $
Chapter 9
Question 19
Input area:
Current dividend 8.00 $
Required return 5.6%
Years until dividend begins 5
Output area:
Price 1 year before dividend 142.86 $
Share price 114.88 $
Chapter 9
Question 20
Input area:
Dividend yield 1.90%
Last price 26.18 $
Change in price (0.13)
P/E ratio 23
Commons shares outstanding 25,000,000
Output area:
Dividend 0.50 $
Yesterday's closing price 26.31 $
Earnings per share 1.138 $
Net income 28,456,522 $
Chapter 9
Question 21
Input area:
Amount of investment 100,000 $
Dividend of 2.25 $ in 1 years
Dividend of 2.40 $ in 2 years
Selling price of 65 $ in 3 years
Tax rate 28%
Required return 15%
Output area:
First dividend aftertax 1.62 $
Second dividend aftertax 1.73 $
Stock price today 45.45 $
Shares owned 2,200.03
Chapter 9
Question 22
Input area:
Dividend next quarter 0.80 $
Quarters of constant dividend 12
Growth rate 1.00%
Annual required return 10%
Output area:
Quarterly required return 2.50%
PV of fixed dividends 8.21 $
PV of stock at end of no growth 53.87 $
PV of future stock price today 40.05 $
Stock price today 48.26 $
Chapter 9
Question 23
Input area:
Years of constant dividends 2
Growth rate 4%
Stock price 45.00 $
Required return 11%
Output area:
Constant dividend factor 1.7125
Future stock price factor 12.0584
Total constant factor 13.7709
Next year's dividend 3.27 $
Chapter 9
Question 24
Input area:
Net income 18,000,000 $
Payout ratio 30%
Shares of stock outstanding 2,000,000
Stock price 93.00 $
ROE 13%
Output area:
Growth rate 9.10%
Current dividends per share 2.70 $
Dividend next year 2.95 $
Required return 12.27%
Chapter 9
Question 25
Input area:
Previous dividend payment 1.35 $
Years since previous dividend 4
Current dividend 1.77 $
Years dividend will grow at historic rate 5
Dividend growth rate after 5%
Year to calculate dividend 7
Output area:
Historic growth rate 7.01%
Dividend in requested year 2.74 $
Chapter 9
Question 26
Input area:
Current earnings 950,000 $
Required return 12%
b) Additional earnings 100,000 $
c) Additional earnings 200,000 $
Output area:
a) Value of company's stock 7,916,666.67 $
P/E ratio 8.33
b) Value of company's stock 8,750,000.00 $
P/E ratio 9.21
c) Value of company's stock 9,583,333.33 $
P/E ratio 10.09
Chapter 9
Question 27
Input area:
EPS 9.40 $
Investment one year from today 1.95 $
Increase in EPS 2 years from today 2.75 $
Increase in EPS 3 years from today 3.05 $
Required return 12%
Output area:
a) Current share price 78.33 $
b) Value today of investment cost 1.74 $
Value today of Year 2 EPS increase 2.19 $
Value today of Year 3 EPS increase 2.17 $
NPVGO 2.62 $
New share price 80.96 $
c) Share price in 4 years 78.33 $
Chapter 9
Question 28
Input area:
Revenues 7,500,000 $
Total costs 3,400,000 $
Shares outstanding 1,000,000
Revenue growth rate 5%
Cost growth rate 5%
Discount rate 13%
Initial outlay for new project 17,000,000 $
Outlay next year for new project 6,000,000 $
Perpetual profit level for new project 4,200,000 $
Output area:
a) PV of revenues 98,437,500 $
PV of costs 44,625,000 $
PV of future dividends 53,812,500 $
Current share price 53.81 $
b) PV of next year's outlay 5,309,734.51 $
Total PV of cash outlays 22,309,734.51 $
PV of earnings increase 28,590,878.15 $
Increase in value of company 6,281,143.64 $
Increase in share price 6.28 $
New share price 60.09 $
Chapter 9
Question 28
Input area:
Revenues 71,000,000 $
Initial outlay for new project 16,000,000 $
Outlay next year for new project 5,000,000 $
Perpetual profit level for new project 11,000,000 $
Shares outstanding 15,000,000
Required return 12%
Output area:
a) Cash cow company value 591,666,667 $
Cash cow stock price 39.44 $
b) PV of next year's outlay 4,464,285.71 $
Total PV of cash outlays 20,464,285.71 $
PV of earnings increase 81,845,238.10 $
NPVGO 61,380,952.38 $
c) NPVGO per share 4.09 $
New share price 43.54 $
Chapter 9
Question 30
Input Area:
EPS 2.35 $
Benchmark PE 21
Earnings growth rate 7%
Output Area:
a. Current stock price 49.35 $
b. Next year's EPS 2.51 $
Target stock price next year 52.80 $
c. Implicit return 7.00%
Chapter 9
Question 31
Input area:
Sales 28,000,000 $
Costs 12,000,000 $
Debt 54,000,000 $
Cash 18,000,000 $
EV/EBITDA multiple 7.5
Shares outstanding 950,000
Output area:
Sales 28,000,000 $
Costs 12,000,000
EBITDA 16,000,000 $
Enterprise value (EV) 120,000,000 $
Equity value 48,000,000 $
Share price 50.53 $
Chapter 9
Question 32
Input area:
Sales 145,000,000 $
Costs 81,000,000 $
Net investment 15,000,000 $
Year 1 Year 2 Year 3 Year 4
Revenue, cost, and investment growth 14% 12% 10% 8%
Terminal growth rate 6%
Shares outstanding 5,500,000
Required return 13%
Tax rate 40%
b. Terminal PE ratio 11
Output area:
Year 1 Year 2 Year 3 Year 4 Year 5 Year 6
a. Sales 145,000,000 $ 165,300,000 $ 185,136,000 $ 203,649,600 $ 219,941,568 $ 233,138,062 $
Costs 81,000,000 92,340,000 103,420,800 113,762,880 122,863,910 130,235,745
Pretax profit 64,000,000 $ 72,960,000 $ 81,715,200 $ 89,886,720 $ 97,077,658 $ 102,902,317 $
Taxes 25,600,000 29,184,000 32,686,080 35,954,688 38,831,063 41,160,927
Net income 38,400,000 $ 43,776,000 $ 49,029,120 $ 53,932,032 $ 58,246,595 $ 61,741,390 $
Net investment 15,000,000 17,100,000 19,152,000 21,067,200 22,752,576 24,117,731
Cash flow 23,400,000 $ 26,676,000 $ 29,877,120 $ 32,864,832 $ 35,494,019 $ 37,623,660 $
Year 7 cash flow 39,881,079 $
Terminal value in Year 6 569,729,704 $
Value of company today 393,449,950 $
Price per share 71.54 $
b. Year 6 teminal value 679,155,293 $
Value of company today 446,009,087 $
Price per share 81.09 $
Chapter 9
Question 33
Input area:
Required return 17%
Most recent dividend 3.50 $
Stock W dividend growth rate 8.5%
Stock X dividend growth rate 0%
Stock Y dividend growth rate -5%
Stock Z:
Initial growth rate 30%
Initial # of years 2
Final growth rate 8%
Output area:
Dividend yields:
Stock W price 44.68 $
Dividend yield 8.5%
Capital gains yield 8.5%
Stock X price 20.59 $
Dividend yield 17%
Capital gains yield 0%
Stock Y price 15.11 $
Dividend yield 22%
Capital gains yield -5%
Stock Z price at final rate 70.98 $
Stock Z current price 60.06
Dividend yield 7.58%
Capital gains yield 9.42%
In all cases, the required return is 20%, but this return is distributed
differently between current income and capital gains. High growth
stocks have an appreciable capital gains component but a
relatively small current income yield; conversely, mature, negative-
growth stocks provide a high current income but also price
depreciation over time.
Chapter 9
Question 34
Input area:
Dividend paid 3.20 $
Dividend growth rate 5%
Required return 11%
# of dividends per year 4
Output area:
a. Price 56.00 $
b. Next four dividends 0.8400 $
Effective quarterly rate 2.64%
Effective first dividend 3.50 $
Share price 58.26 $
Chapter 9
Question 35
Input area:
Perpetual earnings/dividend 8.50 $
Year for investment opportunity 3
Percentage of earnings invested 20%
Percentage return on project 10%
Required return 12%
Output area:
a) Stock price 70.83 $
b) Growth rate of investment 2.00%
Amount reinvested every year 1.70 $
Investment dollar return 0.170 $
Value of investment in year 2 (2.83) $
NPVGO value of today (2.26) $
New share price 68.57 $
Chapter 9
Questions 36, 37
Input area:
Required return 13.00%
Most recent dividend 3.85 $
Year 1 dividend growth rate 20%
Year 2 dividend growth rate 15%
Year 3 dividend growth rate 10%
Year 4 dividend growth rate 5%
Output area:
Year 3 stock price 76.71 $
Share price 65.46 $
To solve problem #37, adjust the required return until
the share price is equal to $78.43. Alternatively, you could
use the "Solver" or "Goal Seek" functions.
Microsoft Excel 14.0 Answer Report
Worksheet: [Jaffe 10th edition Chapter 09.xlsx]#36,37
Report Created: 10/19/2011 12:08:14 PM
Result: Solver found a solution. All Constraints and optimality conditions are satisfied.
Solver Engine
Engine: GRG Nonlinear
Solution Time: 0.032 Seconds.
Iterations: 2 Subproblems: 0
Solver Options
Max Time 100 sec, Iterations 100, Precision 0.000001
Convergence 0.0001, Population Size 100, Random Seed 0, Derivatives Forward, Require Bounds
Max Subproblems Unlimited, Max Integer Sols Unlimited, Integer Tolerance 5%, Solve Without Integer Constraints
Objective Cell (Value Of)
Cell Name Original Value Final Value
$D$21 Share price 65.46 $ 78.43 $
Variable Cells
Cell Name Original Value Final Value Integer
$D$7 Required return 13.00% 11.69% Contin
Constraints
Cell Name Cell Value Formula Status Slack
$D$21 Share price 78.43 $ $D$21=78.43 Binding 0
Max Subproblems Unlimited, Max Integer Sols Unlimited, Integer Tolerance 5%, Solve Without Integer Constraints
Chapter 9
Question 38
Input area:
Earnings per year 18,000,000 $
Growth rate in earnings 5%
Year for new project 2
Earnings percentage to fund project 30%
Increase in earnings from project 6,500,000 $
Shares outstanding 7,500,000
Required return 10%
Output area:
EPS/Dividends per share 2.52 $
Value of firm with learning curve 50.40 $
EPS in year of investment opportunity 2.6460 $
Initial required investment in year 2 0.79 $
Increase in EPS from project 0.87 $
Value of increased earnings in year 2 8.67 $
NPVGO in year 2 7.87 $
NPVGO today 6.51 $
Stock price 56.91 $