Anle Corporation Case

UH ‐ FINA6A35 ‐ MANAGERIAL FINANCE
CHAPTER 9 PROBLEMS
2. Anle Corporation has a current price of $20, is expected to pay a dividend of $1 in one year, and its expected price right after paying that dividend is $22.
a. What is Anle’s expected dividend yield?
Dividend Yield = Div1 / P0 =

=1/20 =

5.0%

b. What is Anle’s expected capital gain rate?
Capital Gain = (P1 ‐ P0) / P0

= (22 ‐ 20 ) / 20 =

10.0%

c. What is Anle’s equity cost of capital?
Equity Cost of Capital = Div1/P0 + (P1 ‐ P0) / P0 =

15.0%

7. Dorpac Corporation has a dividend yield of 1.5%. Dorpac’s equity cost of capital is 8%, and its dividends are expected to grow at a constant rate.
a. What is the expected growth rate of Dorpac’s dividends?
Div. Yield = 1.5% = Div1 / P0
P0 =Div1 /
(rE ‐ g), then

P0 = Div yield x P0 / (rE ‐ g)

re ‐ g = Div.
yield x P0 / P0 g = 8% ‐ 1.5% =

6.5%

Growth rate = g = 6.5%
b. What is the expected growth rate of Dorpac’s share price? rE = Div1 / P0 + (P1 ‐ P0) /P0
(P1 ‐ PO) / P0 = rE ‐ Div1/P0
(P1 ‐ PO) / P0 = rE ‐ Div yield

= 8%‐1.5% =

Growth rate of Dorpac’s share price = 6.5%

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6.5%

12. Procter & Gamble will pay an annual dividend of $0.65 one year from now. Analysts expect this dividend to grow at 12% per year thereafter until the fifth year. After then, growth will level off at 2% per year. According to the dividend‐discount model, what is the value of a share of
Procter & Gamble stock if the firm’s equity cost of capital is 8%?

Dividend Discount Model
P0 

Div1
Div 2
Div N
PN

2  ... 
N 
1  rE 1  rE 
1  rE  1  rE N
Dividend portion
Price of share at year N

Dividend Portion

Per Yr
Discounted

Div 1

Div 2

0.65
1
0.60185

0.728
2
0.62414

Div 3

Div 4

0.81536 0.9132032
3
4
0.64726 0.6712316

Dividends Portion Discounted =

2.5445

Portion of the Share price at year 4
Div5 = 0.65 x (1+0.12)^4 =

1.02279

P4 = Div5 / (rE‐g) =

=0.65 x (1+0.12)^4 / (8% ‐ 2%) = 17.0465

P0 = P4 / (1+ rE)^4

= 17.0465 / (1+0.08)^4 =

12.53

Portion of the Share price at year 4 discounted =

12.53

Total Price today =

2.5445+12.53 =

15.0745

Value of Procter & Gamble share today = P0 =

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15.07