Question

Please also go over the Excel file attached to this assignment in order to familiarize yourself with the different ways Excel can be used to solve Time Value of Money/Dividend Discount Model problems. There are three worksheets in the Excel file. This Excel file with examples is just that: a file to show you some examples of using Excel to solve TVM /DDM problems. Do not confuse this posted Excel file with the separate Excel file you need to create and submit with the answers to this week's homework questions. You should examine the formulas in the posted Excel file and use them as a guide when you create your new Excel file for submission. You may even copy the Excel worksheets from the sample file and then modify it to solve the homework problems.

1. Calculate the value of a preferred stock with a red annual dividend of $2.45, assuming
a discount rate of 9.5%. Solve the problem two different ways: rst by using the
algebraic formula for a constant dividend preferred stock, then by using the built-in
Excel function PV. hint: Use the Preferred Stock example in the posted DDM Excel
Examples le as a guide. Feel free to copy the worksheet and make the minor necessary
changes to answer this question.

2. Calculate the value of a stock with an expected annual dividend of $2.00 next year and
estimated annual dividend growth of 2% per year indenitely. Assume a discount rate
of 8%. Solve the problem two diferent ways: rst by using the algebraic formula for
the Gordon Growth Model, then by using Excel to calculate and sum the dividends
and their respective present values for the next 150 years. hint: Use the PV Const
Growth Dividend example in the posted DDM Excel Examples le as a guide. Feel free
to copy the worksheet and make the minor necessary changes to answer this question.

3. Calculate the value of a stock with the following expectations for dividend payments:
$1.75 in Year 1, $2.00 in Year 2, and then annual dividend growth of 1.5% per year
indenitely. Assume a discount rate of 9%. Solve the problem two different ways: rst
by using the algebraic formula for the Gordon Growth Model combined with PV of
uneven dividend payments, then by using Excel to calculate and sum the dividends
and their respective present values for the next 150 years. hint: Use the Uneven,
then Const. Growth Div example in the posted DDM Excel Examples le as a guide.
Feel free to copy the worksheet and make the minor necessary changes to answer this
question.

4. Calculate the value of a stock with the following expectations for dividend payments:
$1.75 in Years 1, 2 and 3, and then annual dividend growth of 1.5% per year indenitely.
Assume a discount rate of 9%. Solve the problem two different ways: rst by using the
algebraic formula for the Gordon Growth Model combined with PV of uneven dividend
payments, then by using Excel to calculate and sum the dividends and their respective
present values for the next 150 years. hint: Use the Uneven, then Const. Growth
Div example in the posted DDM Excel Examples le as a guide. Feel free to copy the
worksheet and make the minor necessary changes to answer this question.

Answer 1

1. Calculate the value of a preferred stock with a red annual dividend of $2.45, assuming a discount rate of 9.5%.

Value of Preferred Stock = Annual Dividend / Discount rate = 2.45 / 9.50% = $25.79

2. Calculate the value of a stock with an expected annual dividend of $2.00 next year and estimated annual dividend growth of 2% per year indefinitely. Assume a discount rate of 8%.

Value of Stock = Dividend in Next Year / (Discount Rate - Growth rate)

Value of Stock = $2.00 / (8% - 2%)

Value of Stock = $33.33

3. Calculate the value of a stock with the following expectations for dividend payments: $1.75 in Year 1, $2.00 in Year 2, and then annual dividend growth of 1.5% per year indefinitely. Assume a discount rate of 9%.

Value of Stock = $26.07

* Terminal value = Year 2 Dividend * (1 + Growth) / (Discount rate - Growth) = 2 * 1.015 / (9%-1.50%) = $27.07

4. Calculate the value of a stock with the following expectations for dividend payments: $1.75 in Years 1, 2 and 3, and then annual dividend growth of 1.5% per year indefinitely. Assume a discount rate of 9%.

Value of Stock = $22.72

* Terminal value = Year 3 Dividend * (1 + Growth) / (Discount rate - Growth) = $1.75 * 1.015 / (9%-1.50%) = $23.68

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