Financial Concepts Week 5 Exercise 9: Equity Pricing

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§ Additional instructions/comments are highlighted in yellow.

§ To standardize, please leave your answers to two-decimal places, whether they are percentages, or dollars and cents.

§ You may submit this Exercise either as a Word file or as an Excel file. See separate e-mail or posting for attached Excel template.

§As usual, you must show work:

a) If you do the work in Excel, we need to see the Excel formula or algebra embedded in the answer cell(s) on how your answers are calculated.

b) If you do the work in Word document, we need to see the intermediate calculations typed out, e.g. P0 = D1 / (ks – gc) = this number divided by subtracting those two numbers, etc., equals your answer.

c) If student just cut-paste the answers without showing work, it could be a problem if you got it wrong and there is no way for me to see where the mistake is and annotate it with corrections ....



Name: <your name>




Show work by showing any formulas used and any intermediate steps in the calculations.


  1. Company A has projected net income per share for this year at $4.00 per share.It has traditionally paid out a dividend of 40% of its net income. Income and dividends have been growing at a rate of 10% per year. The equity discount rate for comparable companies is 15%.

    1. What is the projected dividend for next year?

      D1 =


    2. What is the current value of the stock using the [Constant Growth Model of the] Dividend Discount Model?

      P0 =



  2. [If from Question 1, having that projected EPS of $4.00,] Company A decides to reduce its dividend rate to 25%, and expects that the growth rate will increase as a result of the higher retained earnings to 12% per year:

    1. What is the new projected dividend for next year?

      D1new =


    2. What is the new stock value?

      P0new =




3.[A separate company] Company B has an ROE of 15%.

  1. What will be its estimated growth rate if it has a dividend payout ratio of 55%?

    g =


  2. If the company decreases the dividend payout ratio to 45%, what will be the new estimated growth rate?

    gnew =




  1. [A separate third company] Company C will have earnings per share of $5.00 this year. It pays a dividend equal to 40% of net income. It is expecting that income and dividends will grow by 30% next year and 20% the year after. Then it is expecting to return to its historical growth rate of 10% per year. The relevant discount rate is 15%.

    1. What are the projected levels of dividends for years 1, 2 and 3.





    2. What is the value of the stock in year 2?

      P2 =


    3. What is the value of the stock today? [assume dividend D0 has been paid out].

      P0 =




  2. Company D has an EBITDA of $350 million. It has outstanding debt of $650 million. Its industry has typically displayed a Value/EBITDA ratio of between 5x and 7x EBITDA. If Company D has 50 million shares outstanding, what is the estimate of the per share value of this company?









    • 7 years ago
    Financial Concepts Week 5 Exercise 9: Equity Pricing Solution

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