Missing Solutions BMA
Chapter 4
18.
a.
Plowback ratio = 1 – payout ratio = 1.0 – 0.5 = 0.5
Dividend growth rate = g= Plowback ratio × ROE = 0.5 × 0.14 = 0.07
Next, compute EPS0 as follows:
ROE = EPS0 /Book equity per share
0.14 = EPS0 /$50  EPS0 = $7.00
Therefore: DIV0 = payout ratio × EPS0 = 0.5 × $7.00 = $3.50
EPS and dividends for subsequent years are:
Year
0
1
2
3
4
5
EPS
$7.00
$7.00 × 1.07 = $7.4900
$7.00 × 1.072 = $8.0143
$7.00 × 1.073 = $8.5753
$7.00 × 1.074 = $9.1756
$7.00 × 1.074 × 1.023 = $9.3866
DIV
$7.00 × 0.5 = $3.50
$7.4900 × 0.5 = $3.50 × 1.07 = $3.7450
$8.0143 × 0.5 = $3.50 × 1.072 = $4.0072
$8.5753 × 0.5 = $3.50 × 1.073 = $4.2877
$9.1756 × 0.5 = $3.50 × 1.074 = $4.5878
$9.3866 × 0.5 = $3.50 × 1.074 × 1.023 = $4.6933
EPS and dividends for year 5 and subsequent years grow at 2.3% per
year, as indicated by the following calculation:
Dividend growth rate = g = Plowback ratio × ROE = (1 – 0.08) × 0.115 = 0.023
b.
P0 

DIV 3
DIV1
DIV 2
DIV 4
1 
 DIV 5






1
2
3
4
4
1.115
1.115 1.115 1.115
 0.115 1.115 
3.745
4.007 4.288 4.588 
4.693
1 





 $45.65
1
2
3
4
4 
1.115
1.115 1.115 1.115
 0.115 - 0.023 1.10 
The last term in the above calculation is dependent on the payout ratio
and the growth rate after year 4.
19.
DIV1
8.5
g 
 0.075  0.1175  11.75%
P0
200
a.
r
b.
g = Plowback ratio × ROE = (1 − 0.5) × 0.12 = 0.06 = 6.0%
The stated payout ratio and ROE are inconsistent with the
security analysts’ forecasts. With g = 6.0% (and assuming r
remains at 11.75%) then:
P0 
DIV1
8.5

147.83 pesos
r  g 0.1175 - 0.06
Chapter 5
12.
a.
Because Project A requires a larger capital outlay, it is possible that
Project A has both a lower IRR and a higher NPV than Project B.
(In fact, NPVA is greater than NPVB for all discount rates less than
10 percent.) Because the goal is to maximize shareholder wealth,
NPV is the correct criterion.
b.
To use the IRR criterion for mutually exclusive projects, calculate the
IRR for the incremental cash flows:
C0
C1
C2
IRR
A-B
-200
+110
+121
10%
Because the IRR for the incremental cash flows exceeds the cost of
capital, the additional investment in A is worthwhile.
c.
NPVA   $400 
$250 $300

 $ 81.86
1.09 (1.09) 2
NPVB   $200 
$140
$179

 $79.10
1.09
(1.09) 2