9-20

𝐹𝐶𝐹 = [𝐸𝐵𝐼𝑇(1 − 𝑇) + 𝐷𝑒𝑝. ]

− [𝐶𝑎𝑝. 𝐸𝑥𝑝𝑒𝑛𝑑𝑖𝑡𝑢𝑟𝑒𝑠
+ ∆𝑁𝑂𝑊𝐶]
𝐹𝐶𝐹 = ⌈$500,000,000 + $100,000,000⌉
+ ⌈$200,000,000 + $0⌉
𝐹𝐶𝐹 = $400,000,000

𝐹𝐶𝐹
𝑀𝑉𝑇𝑜𝑡𝑎𝑙 =
𝑊𝐴𝐶𝐶 − 𝑔
$400,000,000
𝑀𝑉𝑇𝑜𝑡𝑎𝑙 =
0.1 − 0.06
𝑀𝑉𝑇𝑜𝑡𝑎𝑙 = $10,000,000,000

𝑀𝑉𝑇𝑜𝑡𝑎𝑙 = 𝑀𝑉𝐸𝑞𝑢𝑖𝑡𝑦 + 𝑀𝑉𝐷𝑒𝑏𝑡

$10,000,000,000
= 𝑀𝑉𝐸𝑞𝑢𝑖𝑡𝑦
+ $3,000,000,000
𝑀𝑉𝐸𝑞𝑢𝑖𝑡𝑦 = $7,000,000,000

𝑀𝑉𝐸𝑞𝑢𝑖𝑡𝑦
𝑆𝑡𝑜𝑐𝑘 𝑃𝑟𝑖𝑐𝑒 =
𝑁𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑆ℎ𝑎𝑟𝑒𝑠
$7,000,000,000
𝑆𝑡𝑜𝑐𝑘 𝑃𝑟𝑖𝑐𝑒 =
200,000,000
𝑆𝑡𝑜𝑐𝑘 𝑃𝑟𝑖𝑐𝑒 = $35
9-21 𝑃̂0 = 𝑃𝑉𝐷𝑖𝑣𝑖𝑑𝑒𝑛𝑑𝑠 + 𝑃𝑉𝑃̂2017
a. 𝑃̂0 = $9.64 + $29.96 = $39.42
𝐷𝑡 = 𝐷0 (1 + 𝑔)𝑡
𝐷2013 = $1.75(1 + 0.15)1 = $2.01 c.
𝐷2014 = $1.75(1 + 0.15)2 = $2.31 𝐷1 $2.01
𝐸𝑥𝑝𝑒𝑐𝑡 𝐷𝑌 = = = 5.1%
𝐷2015 = $1.75(1 + 0.15)3 = $2.66 𝑃0 $39.42

𝐷2016 = $1.75(1 + 0.15)4 = $3.06 𝑇𝑜𝑡𝑎𝑙 𝑅𝑒𝑡𝑢𝑟𝑛 = 𝑟𝑠 = 12%

𝐷2017 = $1.75(1 + 0.15)5 = $3.52 𝐷1

𝐶𝐺𝑌 = 𝑟𝑠 − = 12% − 5.1% = 6.9%
𝑃0

b.
𝐷1 $3.70
𝐷𝑡 𝐸𝑥𝑝𝑒𝑐𝑡 𝐷𝑌 = = = 7%
𝑃𝑉 = 𝑃0 $52.80
(1 + 𝑟𝑠 )𝑡
𝑇𝑜𝑡𝑎𝑙 𝑅𝑒𝑡𝑢𝑟𝑛 = 𝑟𝑠 = 12%
$2.01
𝐷2013 = = $1.79 𝐷1
(1 + 0.12)1 𝐶𝐺𝑌 = 𝑟𝑠 − = 12% − 7% = 5%
𝑃0
$2.31
𝐷2014 = = $1.84
(1 + 0.12)2
$2.66 d.
𝐷2015 = = $1.89
(1 + 0.12)3 High taxes would force the investor to buy
$3.06 growth stocks while low taxes for the
𝐷2016 = = $1.94
(1 + 0.12)4
investor to get stocks with cash dividends.
$3.52
𝐷2017 = = $2.00 Maturity of the stock will be on year 2017
(1 + 0.12)5
𝑃𝑉𝐷𝑖𝑣𝑖𝑑𝑒𝑛𝑑𝑠 = $9.64
e.

𝐷2017 (1 + 𝑔)𝑡 These changes will lower the price of

𝑃̂2017 =
𝑟𝑠 − 𝑔𝑛 WME's stock
$3.52(1 + 0.05)
𝑃̂2017 = = $52.80
0.12 − 0.05
f.
The higher required rate of return would
$52.80
𝑃𝑉𝑃̂2017 = = $29.96 decrease stock price, but increase CY and
(1 + 0.12)5
DY