AEM4620: Advanced Financial Modeling

Homework Assignment #3
Due date: September 26, 2016 before the lecture

Note: The following questions are derived/modified from exercise questions in Chapters 2 and 3
of the SB textbook.

Chapter 2: Question 4
Use the template for the ABC Corp. valuation in section 2.7 to value Cisco stock. Assume
that the weighted average cost of capital for Cisco is 16%, the growth rate for years 15
is 6%, and that the long-term growth rate is 2%.

Chapter 3: Question 1
ABC Corp. has a stock price P0 = 60. The firm has just paid a dividend of $2 per share,
and intelligent shareholders think that this dividend will grow by a rate of 6% per year.
Use the Gordon dividend model to calculate the cost of equity of ABC.

Question 2
Unheardof, Inc., has just paid a dividend of $5 per share. This dividend is anticipated to
increase at a rate of 10% per year. If the cost of equity for Unheardof is 20%, what should
be the market value of a share of the company?

Question 4
Consider the following dividend and price data for Chrysler:

Use the Gordon model to calculate Chryslers cost of equity at end-1996 on the basis of
dividends only.

Question 5
The current stock price of TransContinentalAirways is $60 per share. TCA currently pays
an annual per-share dividend of $4. Over the past 5 years this dividend has grown annually
at a rate of 20%. A respected analyst assumes that the current growth rate of dividends
will hold up for the next 5 years, after which dividend growth will slow to 6% annually.
Use the twostagegordon function to compute the cost of equity.