A small economy in an unknown location in the world has since the beginning of time (year 0) experienced 24 years of falling interest rates and one went from paying approx. 6% interest on 10-year government bonds 24 years ago to paying as little as 0% interest on 10-year Treasuries today. The interest rate has fallen gradually by 0.25% every year. Assume that company A has had a risk premium that has remained stable at 6% throughout period and that a dividend of SEK 10 per share was distributed in year 1. The dividend has since grown according to expectation of 2% per year, which is also the growth rate expected for the foreseeable future. Assume that the interest rate on 10-year government securities is equal to the risk-free rate and calculate the required rate of return to = +. -Value Company A's share for each year from year 0 to year 24 using DDM (Formula (10) in the formula collection) and plot the stock's value in a graph. Suppose that at each time has assumed that the prevailing interest rate will last forever.

-Value Company A's share under two hypothetical scenarios where the interest instead in it one case stands still at 2% from year 0 to year 24 and in the other case stands still at 6% during the whole period. Plot the values according to the two different scenarios in the same diagram as above. -You realize that there is some risk that the zero interest rate that applies today may not apply forever and wants to make a forecast about how Company A's future share price will be developed according to three different scenarios. Calculate the share price for Company A for each year 24 years ahead according to the three interest rate forecasts in Table 1. Plot your result in a new one chart together with your result from

-Your diagram should therefore contain a curve which describes the share price from year 0 to year 24 with decreasing interest according to i). From year 25 to year 48, you should plot the three different curves generated by the different forecasts. Table 1

Interest from year 25 and forever Forecast 1 0%

Forecast 2 1%

Forecast 3 2%

- Calculate the value today (year 24) for Company A and the Company B. You expect the period of zero interest to come continue in the coming year but that the interest rate will then rise by 0.5% for each year until the interest rate has reached 2%. After that, you think the interest rate will stay the same at 2% forever. As we know, Company A has a dividend growth rate of 2 %. An additional company B, however, is not expected to pay any dividends at all during this period the next 2 years and only after 5 years the dividend will have a constant growth for perpetuity, then at 5% per annum.

Table 2

In 1 year 2 years 3 years 4 years 5 years

Interest 0% 0.5% 1% 1.5% 2%

Dividend

Company A 16.0844 16.4061 16.7342 17.0689 17.4102

Company B 0 0 10 20 30

Dividend growth after 5 years Risk premium

Company A 2% 6%

Company B 5% 6%

Calculate the percentage change in the share price for Company A and Company B that occurs if you move from an interest rate position where the interest rate is expected to be 0% for all future compared to the case in the table above where you successively go from 0% to 2% interest. Present your results in the form of a table with the share price for Company A and Company B under the two different scenarios and the percentage difference between the different scenarios. Recall that the present value of a future amount at time with a discount rate, = +, which varies is calculated according to = (1+1)(1+2)(1+3)...(1+) But that this can be simplified only when the interest rate is constant = (1+) Present your result by filling in the values in the table below

Example of answer table question 1

Valuation of the Case 1 The interest rate Case 2 Interest according Percentage change then we of shares in 24. equals 0 % forever. to Table 2. updating our expectation

the interest from case 1 to case 2.

Company A 402.11

Company B

Repeat the calculations, but add 2% interest to both cases. So, instead of constant zero interest you should do your calculations with 2% interest constant forever as well the case where the interest rate rises from 2% to 4% in increments of 0.5%. Present your result by entering the share price for Company A and Company B under the two different the scenarios as well as the percentage difference between the different scenarios a similar table as you did before.