• Please see the attached Word.doc, input the following 3 answers provided in the Word.doc in the Excel spreadsheet provided, explaining what you are about to do and why, and explaining your answers to the problems.

8-19 Value a Constant Growth Stock Financial analysts forecast Safeco Corp.'s (SAF) growth rate for the future to be 8 percent. Safeco's recent dividend was $0.88. What is the value of Safeco stock when the required return is 12 percent? (LG8-5) P0 = D0*(1+g)/(Ks-g) = 0.88*(1+8%)/(12%-8%) = $23.76 8-25 P/E Ratio Model and Future Price Kellogg Co. (K) recently earned a profit of $2.52 earnings per share and has a P/E ratio of 13.5. The dividend has been growing at a 5 percent rate over the past few years. If this growth rate continues, what would be the stock price in five years if the P/E ratio remained unchanged? What would the price be if the P/E ratio declined to 12 in five years? (LG8-7) P5 = (P/E)*EPS*(1+g)^5 = 13.5*2.52*(1+5%)^5 = $43.42 P5 = (P/E)*EPS*(1+g)^5 = 12*2.52*(1+5%)^5 = $38.59 8-33 Variable Growth A fast-growing firm recently paid a dividend of $0.35 per share. The dividend is expected to increase at a 20 percent rate for the next three years. Afterwards, a more stable 12 percent growth rate can be assumed. If a 13 percent discount rate is appropriate for this stock, what is its value? (LG8-6) D0=0.35, gN = 20% for 3 yrs g=12%, Ks = 13% D1 = do*(1+g) = 0.35*(1+20%) = 0.42 D2 = 0.42*(1+20%) = 0.50 D3 = 0.50*(1+20%) = 0.60 When Normal growth, D4 = 0.60*(1+12%) = 0.68 So Horizon Value P3 = D4/(Ks-g) = 0.68/(13%-12%) = 68.00 So P0 = D1/(1+Ks) + D2/(1+Ks)^2 + (P3+D3) /(1+Ks)^3 So P0 = 0.42/(1+13%) + 0.50/(1+13%)^2 + (68+0.60) /(1+13%)^3 So P0 = $48.31 8-34 Variable Growth A fast-growing firm recently paid a dividend of $0.40 per share. The dividend is expected to increase at a 25 percent rate for the next four years. Afterwards, a more stable 11 percent growth rate can be assumed. If a 12.5 percent discount rate is appropriate for this stock, what is its value? (LG8-6) D0=0.40, gN = 25% for 4 yrs g=11%, Ks = 12.5% D1 = do*(1+g) = 0.4*(1+25%) = 0.50 D2 = 0.50*(1+25%) = 0.63 D3 = 0.63*(1+25%) = 0.78 D4 = 0.78*(1+25%) = 0.98 When Normal growth, D5 = 0.98*(1+11%) = 1.08 So Horizon Value P4 = D5/(Ks-g) = 1.08/(12.5%-11%) = 72.27 So P0 = D1/(1+Ks) + D2/(1+Ks)^2 + D3/(1+Ks)^3 + (P4+D4) /(1+Ks)^4 So P0 = 0.50/(1+12.5%) + 0.63/(1+12.5%)^2 + 0.78/(1+12.5%)^3 + (72.27+0.98)/(1+12.5%)^4 So P0 = $66.60