Chapter 9 (not finished)

Question 1

A stock creates value for its owner in 2 ways

Answer 1

Dividends paid out as cash to shareholders
Future sale of the stock for a higher price

Question 2

Price of a stock

Answer 2

P0 = Div 1 + P 1 / (1 + rE)

Question 3

rE

Answer 3

Equity cost of capital –> expected return of other investments available in the market with equivalent risk to the firm’s shares

Question 4

Total return

Answer 4

rE = Div1 + P1 /(P0) - 1

= Div 1/P0 –> Dividend Yield
+ P1-P0/(P0) –> Capital gain rate

Question 5

Dividend per share at date t

Answer 5

(Earnings t / Shares outstanding t) x Dividend Payout rate t

Question 6

Changes in earnings

Answer 6

New investment x Return on New investment

–> New investment = Earnings x Retention rate

Question 7

Retention rate

Answer 7

The fraction of current earnings that the firm retains

Question 8

Growth rate in dividends

Answer 8

Retention rate x Return on New investment

–> Sustainable growth rate

Question 9

Net investment

Answer 9

Capital expenditures - Depreciation