I am having trouble understanding the way it is presented in the solution sheet. Would it also be correct to define the NPVGO by subtracting the Normal Price from the Growth Price, like this: Pg−P0=37.50−41.67?
Exercise Set: Stocks and Bonds Valuation: Calazans Duarte Number 3
by Nora Porfanter -
Number of replies: 3
In reply to Nora Porfanter
Re: Exercise Set: Stocks and Bonds Valuation: Calazans Duarte Number 3
by Julio Crego -
Hi Nora,
I am struggling to find the 37.50. Could you let me know how did you get the number?
I am struggling to find the 37.50. Could you let me know how did you get the number?
In reply to Julio Crego
Re: Exercise Set: Stocks and Bonds Valuation: Calazans Duarte Number 3
by Nora Porfanter -
Hello, Thank you very much for your response. I initially thought I needed to calculate the growth price myself using the formula D1/r-g. To do this, I calculated D1 by multiplying the EPS by (1−retention rate), which gave me:
5×(1−0.25)=3.75
I then applied it to the formula:
3.75/ 0.12−0.02
However, I’m unsure if this was the correct approach, as the solution was a completely different method.
5×(1−0.25)=3.75
I then applied it to the formula:
3.75/ 0.12−0.02
However, I’m unsure if this was the correct approach, as the solution was a completely different method.
In reply to Nora Porfanter
Re: Exercise Set: Stocks and Bonds Valuation: Calazans Duarte Number 3
by Julio Crego -
I see it now. You were correct in your calculations. However, you only considered the dividends from time 5 onward, and you did not discount. Using your approach, you can solve for the price as:
\(S_0 = \dfrac{5}{1.12} + \dfrac{5}{1.12^2}+\dfrac{5}{1.12^3}+\dfrac{5}{1.12^4}+\dfrac{1}{1.12^4}\left(\dfrac{5\times (1-0.25)}{0.12-0.02}\right)\)
I have attached the Excel sheet using your approach