STOCK

VALUATION
Part I
KRM

1
IMPORTANT NOTICE TO STUDENTS
You are hereby prohibited from reproducing, re-
publishing, re-broadcasting, re-posting, re-
transmitting or transferring in whole or in part any
Course Outlines, Course Materials or Lectures
which have been provided to you as part of your
course of study at The University of the West Indies
(The UWI), without the prior permission of The UWI,
its authorised agents or copyright holders.

2
 3

Key Objectives – Part I

 Differentiate between debt and equity.

 Discuss the features of both common and

preferred stock.

 Describe the process of issuing common

stock, including venture capital, going
public and the investment banker.
 © 2012 Pearson Prentice Hall. All rights reserved.

Differences Between
Debt and Equity
• Debt includes all borrowing incurred by a firm, including bonds,
and is repaid according to a fixed schedule of payments.
• Equity consists of funds provided by the firm’s owners
(investors or stockholders) that are repaid subject to the firm’s
performance.
• Debt financing is obtained from creditors and equity financing is
obtained from investors who then become part owners of the
firm.
• Creditors (lenders or debtholders) have a legal right to be repaid,
whereas investors only have an expectation of being repaid.

7-4
Differences Between Debt and
Equity: (1) Voice in Management

• Unlike creditors, holders of equity (stockholders)

are owners of the firm.
• Stockholders generally have voting rights that
permit them to select the firm’s directors and vote
on special issues.
• In contrast, debtholders do not receive voting
privileges but instead rely on the firm’s
contractual obligations to them to be their voice.
7-5
Differences Between Debt and Equity:
(2) Claims on Income and Assets
• Equity holders’ claims on income and assets are
secondary to the claims of creditors.
 Their claims on income cannot be paid until the
claims of all creditors, including both interest and
scheduled principal payments, have been satisfied.
• Because equity holders are the last to receive
distributions, they expect greater returns to
compensate them for the additional risk they
bear.
7-6
Differences Between Debt
and Equity: (3) Maturity
• Unlike debt, equity capital is a permanent
form of financing.
• Equity has no maturity date and never has
to be repaid by the firm.

7-7
Differences Between Debt and
Equity: (4) Tax Treatment
• Interest payments to debtholders are treated as
tax-deductible expenses by the issuing firm.
• Dividend payments to a firm’s stockholders
are not tax-deductible.
• The tax deductibility of interest lowers the
corporation’s cost of debt financing, further
causing it to be lower than the cost of equity
financing.
7-8
Table 7.1 Key Differences between
Debt and Equity Capital

7-9
Common and Preferred Stock:
Common Stock
• Common stockholders, who are sometimes referred to as
residual owners or residual claimants, are the true owners of
the firm.
• As residual owners, common stockholders receive what is
left—the residual—after all other claims on the firms
income and assets have been satisfied.
• They are assured of only one thing: that they cannot lose any
more than they have invested in the firm.
• Because of this uncertain position, common stockholders
expect to be compensated with adequate dividends and
ultimately, capital gains.

7-10
Common Stock: Ownership
• The common stock of a firm can be privately owned by an
private investors, closely owned by an individual investor or a
small group of investors, or publicly owned by a broad group
of investors.
• The shares of privately owned firms, which are typically small
corporations, are generally not traded; if the shares are traded,
the transactions are among private investors and often require
the firm’s consent.
• Large corporations are publicly owned, and their shares are
generally actively traded in the broker or dealer markets.

7-11
Common Stock: Par Value
• The par value of common stock is an arbitrary value established
for legal purposes in the firm’s corporate charter, and can be
used to find the total number of shares outstanding by dividing it
into the book value of common stock.
• When a firm sells new shares of common stock, the par value of
the shares sold is recorded in the capital section of the balance
sheet as part of common stock.
• At any time the total number of shares of common stock
outstanding can be found by dividing the book value of common
stock by the par value.

7-12
Common Stock:
Preemptive Rights
• A preemptive right allows common stockholders to maintain
their proportionate ownership in the corporation when new
shares are issued, thus protecting them from dilution of their
ownership.
• Dilution of ownership is a reduction in each previous
shareholder’s fractional ownership resulting from the issuance
of additional shares of common stock.
• Dilution of earnings is a reduction in each previous
shareholder’s fractional claim on the firm’s earnings resulting
from the issuance of additional shares of common stock.

7-13
Common Stock:
Preemptive Rights (cont.)
• Rights are financial instruments that allow stockholders to
purchase additional shares at a price below the market
price, in direct proportion to their number of owned shares.
• Rights are an important financing tool without which
shareholders would run the risk of losing their
proportionate control of the corporation.
• From the firm’s viewpoint, the use of rights offerings to
raise new equity capital may be less costly than a public
offering of stock.
7-14
Common Stock: Authorized,
Outstanding and Issued Shares
• Authorized shares are the shares of common stock that a firm’s
corporate charter allows it to issue.
• Outstanding shares are issued shares of common stock held by
investors, this includes private and public investors.
• Treasury stock are issued shares of common stock held by the
firm; often these shares have been repurchased by the firm.
• Issued shares are shares of common stock that have been put
into circulation.
Issued shares = outstanding shares + treasury stock

7-15
Common Stock: Authorized,
Outstanding, and Issued Shares (cont.)
Golden Enterprises, a producer of medical pumps,
has the following stockholders’ equity account on
December 31st.

7-16
Common Stock: Voting Rights
• Generally, each share of common stock entitles its holder to one
vote in the election of directors and on special issues.
• Votes are generally assignable and may be cast at the annual
stockholders’ meeting.
• A proxy statement is a statement transferring the votes of a
stockholder to another party.
 Because most small stockholders do not attend the annual meeting to
vote, they may sign a proxy statement transferring their votes to
another party.
 Existing management generally receives the stockholders’ proxies,
because it is able to solicit them at company expense.

7-17
Common Stock: Dividends
• The payment of dividends to the firm’s shareholders is at
the discretion of the company’s board of directors.
• Dividends may be paid in cash, stock, or merchandise.
• Common stockholders are not promised a dividend, but
they come to expect certain payments on the basis of the
historical dividend pattern of the firm.
• Before dividends are paid to common stockholders any
past due dividends owed to preferred stockholders must
be paid.

7-18
Common Stock:
International Stock Issues
• The international market for common stock is not as large as
that for international debt.
• However, cross-border issuance and trading of common stock
have increased dramatically during the past 30 years.
• Stock Issued in Foreign Markets
 A growing number of firms are beginning to list their stocks on foreign
markets.
 Issuing stock internationally both broadens the company’s ownership
base and helps it to integrate itself in the local business environment.
 Locally traded stock can facilitate corporate acquisitions, because shares
can be used as an acceptable method of payment.

7-19
Preferred Stock
• Preferred stock gives its holders certain privileges that make
them senior to common stockholders.
• Preferred stockholders are promised a fixed periodic dividend,
which is stated either as a percentage or as a dollar amount.
• Par-value preferred stock is preferred stock with a stated face
value that is used with the specified dividend percentage to
determine the annual dollar dividend.
• No-par preferred stock is preferred stock with no stated face
value but with a stated annual dollar dividend.

7-20
Preferred Stock: Basic Rights of
Preferred Stockholders
• Preferred stock is often considered quasi-debt because, much
like interest on debt, it specifies a fixed periodic payment
(dividend).
• Preferred stock is unlike debt in that it has no maturity date.
• Because they have a fixed claim on the firm’s income that takes
precedence over the claim of common stockholders, preferred
stockholders are exposed to less risk.
• Preferred stockholders are not normally given a voting right,
although preferred stockholders are sometimes allowed to elect
one member of the board of directors.

7-21
Preferred Stock:
Features of Preferred Stock
1. Restrictive covenants including provisions about
passing dividends, the sale of senior securities, mergers,
sales of assets, minimum liquidity requirements, and
repurchases of common stock.
2. Cumulation
• Cumulative preferred stock is preferred stock for which all
passed (unpaid) dividends in arrears, along with the current
dividend, must be paid before dividends can be paid to
common stockholders.
• Noncumulative preferred stock is preferred stock for which
passed (unpaid) dividends do not accumulate.

7-22
Preferred Stock:
Features of Preferred Stock (cont.)
3. Other features:
• A callable feature is a feature of callable
preferred stock that allows the issuer to retire the
shares within a certain period time and at a
specified price.
• A conversion feature is a feature of convertible
preferred stock that allows holders to change each
share into a stated number of shares of common
stock.

7-23
Issuing Common Stock
• Initial financing for most firms typically comes from
a firm’s original founders in the form of a common
stock investment.
• Early stage debt or equity investors are unlikely to
make an investment in a firm unless the founders also
have a personal stake in the business.
• Initial non-founder financing usually comes first
from private equity investors.
• After establishing itself, a firm will often “go public”
by issuing shares of stock to a much broader group.
7-24
Issuing Common Stock:
Venture Capital
• Venture capital is privately raised external equity capital used
to fund early-stage firms with attractive growth prospects.
• Venture capitalists (VCs) are providers of venture capital;
typically, formal businesses that maintain strong oversight over
the firms they invest in and that have clearly defined exit
strategies.
• Angel capitalists (angels) are wealthy individual investors who
do not operate as a business but invest in promising early-stage
companies in exchange for a portion of the firm’s equity.

7-25
Table 7.2 Organization of Institutional
Venture Capital Investors

7-26
Going Public
When a firm wishes to sell its stock in the primary
market, it has three alternatives:
1. A public offering, in which it offers its shares for sale
to the general public.
2. A rights offering, in which new shares are sold to
existing shareholders.
3. A private placement, in which the firm sells new
securities directly to an investor or a group of
investors.

7-27
Going Public (cont.)
• IPOs are typically made by small, fast-growing
companies that either:
 require additional capital to continue expanding, or
 have met a milestone for going public that was established in
a contract to obtain VC funding.
• The firm must obtain approval of current
shareholders, and hire an investment bank to
underwrite the offering.
• The investment banker is responsible for promoting
the stock and facilitating the sale of the company’s
IPO shares.
7-28
Going Public (cont.)
• The company must file a registration statement with
the SEC.
• The prospectus is a portion of a security registration
statement that describes the key aspects of the issue,
the issuer, and its management and financial position.
• A red herring is a preliminary prospectus made
available to prospective investors during the waiting
period between the registration statement’s filing
with the SEC and its approval.

7-29
Going Public (cont.)
• Investment bankers and company officials promote
the company through a road show, a series of
presentations to potential investors around the
country and sometimes overseas.
• This helps investment bankers gauge the demand for
the offering which helps them to set the initial offer
price.
• After the underwriter sets the terms, the SEC must
approve the offering.

7-30
Going Public:
The Investment Banker’s Role
• An investment banker is a financial intermediary that
specializes in selling new security issues and advising firms
with regard to major financial transactions.
• Underwriting is the role of the investment banker in bearing
the risk of reselling, at a profit, the securities purchased from an
issuing corporation at an agreed-on price.
• This process involves purchasing the security issue from the
issuing corporation at an agreed-on price and bearing the risk of
reselling it to the public at a profit.
• The investment banker also provides the issuer with advice
about pricing and other important aspects of the issue.

7-31
 STOCK
VALUATION
Part II
KRM

32
IMPORTANT NOTICE TO STUDENTS
You are hereby prohibited from reproducing, re-
publishing, re-broadcasting, re-posting, re-
transmitting or transferring in whole or in part any
Course Outlines, Course Materials or Lectures
which have been provided to you as part of your
course of study at The University of the West Indies
(The UWI), without the prior permission of The UWI,
its authorised agents or copyright holders.

33
 34

Key Objectives – Part II

 Understand the concept of market
efficiency

 Utilize the basic stock valuation – Dividend

Capitalization Model using zero-growth,
constant-growth and variable-growth
models.
Common Stock Valuation
• Common stockholders expect to be rewarded through periodic
cash dividends and an increasing share value.
• Some of these investors decide which stocks to buy and sell
based on a plan to maintain a broadly diversified portfolio.
• Other investors have a more speculative motive for trading.
 They try to spot companies whose shares are undervalued—meaning
that the true value of the shares is greater than the current market price.
 These investors buy shares that they believe to be undervalued and sell
shares that they think are overvalued (i.e., the market price is greater
than the true value).

7-35
 © 201 Pearson Prentice
Hall. All rights reserved.

Common Stock Valuation:

Market Efficiency
• Economically rational buyers and sellers use their assessment
of an asset’s risk and return to determine its value.
• In competitive markets with many active participants, the
interactions of many buyers and sellers result in an equilibrium
price—the market value—for each security.
• Because the flow of new information is almost constant, stock
prices fluctuate, continuously moving toward a new
equilibrium that reflects the most recent information available.
• This general concept is known as market efficiency.

7-36
Common Stock Valuation:
Market Efficiency
The efficient-market hypothesis (EMH) is a theory
describing the behavior of an assumed “perfect”
market in which:
 securities are in equilibrium,
 security prices fully reflect all available information
and react swiftly to new information, and
 because stocks are fully and fairly priced, investors
need not waste time looking for mispriced securities.

7-37
Common Stock Valuation:
Market Efficiency
• Although considerable evidence supports the
concept of market efficiency, a growing body of
academic evidence has begun to cast doubt on
the validity of this notion.
• Behavioral finance is a growing body of
research that focuses on investor behavior and
its impact on investment decisions and stock
prices.
7-38
 39

Common Stock Valuation:

Dividend Capitalization Model
The value of a share of common stock is equal to
the present value of all future cash flows
(dividends) that it is expected to provide.

where
P0 = value of common stock
Dt = per-share dividend expected at the end of year t
Rs = required return on common stock
P0 = value of common stock
 40

Common Stock Valuation Model:

Zero Growth Model
 Assumption - same dividend expected each year

 The equation shows that with zero growth, the

value of a share of stock would equal the present
value of a perpetuity of D1 dollars discounted at a
rate rs.
 41

ICP #9
• Chuck Swimmer estimates that the dividend of
Denham Company, an established textile
producer, is expected to remain constant at $3
per share indefinitely.

• Determine the value of Denham Company’s

stock if Chuck’s required return on its stock is
15%.
𝐷1
Po = 𝑘𝑠
 42

ICP #2
• A firm has an issue of preferred stock
outstanding that has a stated annual dividend of
$4. The required return on the preferred stock
has been estimated at 16 percent.

• Compute the value of the preferred stock?

𝐷1
Po = 𝑘𝑠
 43

ICP #3 – P7-5 [PMF]

Scotto Manufacturing is a mature firm in the machine tool component
industry. The firm’s most recent common stock dividend was $2.40 per
share. Because of its maturity as well as its stable sales and earnings, the
firm’s management feels that dividends will remain at the current level for
the foreseeable future.
Required:
 a. If the required return is 12%, what will be the value of Scotto’s
common stock?
𝐷1
Po = 𝑘𝑠

 b. If the firm’s risk as perceived by market participants suddenly

increases, causing the required return to rise to 20%, what will be the
common stock value?
𝐷1
Po =
𝑘𝑠

 c. Judging on the basis of your findings in parts a and b, what impact

does risk have on value? Explain.
 44

Common Stock Valuation:

Constant-Growth Model
Assumption - dividends will grow at a constant rate, but a
rate that is less than the required return.

The Gordon model is a common name for the constant-

growth model that is widely cited in dividend valuation.
Where:
D1 = Do x (1+g)
D2 = D1 x (1+g) OR Do x (1+g)2
D3 = D2 x (1+g) OR Do x (1+g)3
Etc…
 45

ICP #4
Lamar Company, a small cosmetics company, paid
the following per share dividends:

Determine the value of this share assuming rs = 15%.

46
 47

Let’s watch the Screen Recording of this using the F/C App
48
 49

ICP #5 – P7-9 [PMF]

P7-9 [PMF] – Manipulation of Gordon’s Model
McCracken Roofing, Inc., common stock paid a
dividend of $1.20 per share last year. The company
expects earnings and dividends to grow at a rate of
5% per year for the foreseeable future.

Required:
 a. What required rate of return for this stock would
result in a price per share of $28?
 b. If McCracken expects both earnings and
dividends to grow at an annual rate of 10%, what
required rate of return would result in a price per
share of $28?
 50

McCracken Roofing, Inc., common stock paid a dividend of $1.20 per

share last year. The company expects earnings and dividends to grow at
a rate of 5% per year for the foreseeable future.
Required:
a. What required rate of return for this stock would result in a price per
share of $28?
 51

McCracken Roofing, Inc., common stock paid a dividend of $1.20 per

share last year. The company expects earnings and dividends to grow at
a rate of 5% per year for the foreseeable future.
Required:
a. What required rate of return for this stock would result in a price per
share of $28?
 52

McCracken Roofing, Inc., common stock paid a dividend of

$1.20 per share last year. The company expects earnings and
dividends to grow at a rate of 5% per year for the foreseeable
future.
Required:
b. If McCracken expects both earnings and dividends to grow at
an annual rate of 10%, what required rate of return would result in
a price per share of $28?
 53

Common Stock Valuation:

Variable-Growth Model
• The zero- and constant-growth common stock
models do not allow for any shift in expected
growth rates.
• The variable-growth model is a dividend
valuation approach that allows for a change in
the dividend growth rate.
• To determine the value of a share of stock in the
case of variable growth, we use a four-step
procedure.
54
 55

Common Stock Valuation:

Variable-Growth Model
Step 1. Find the value of the cash dividends at
the end of each year, Dt, during the initial growth
period, years 1 though N.

Dt = D0 × (1 + g1)t
where:
D1 = Do x (1+g)
D2 = D1 x (1+g) OR Do x (1+g)2
D3 = D2 x (1+g) OR Do x (1+g)3
Etc…
 56

Common Stock Valuation:

Variable-Growth Model
Step 2. Find the present value of the dividends
expected during the initial growth period.
 57

Common Stock Valuation:

Variable-Growth Model
Step 3:
a) Find the value of the stock at the end of the initial growth
period, PN = (DN+1)/(rs – g2), which is the present value of
all dividends expected from year N + 1 to infinity,
assuming a constant dividend growth rate, g2.
b) Find the PV of PN which represents the value today of all
dividends that are expected to be received from year N + 1
to infinity
 58

Common Stock Valuation:

Variable-Growth Model

Step 4. Add the present value components found

in Steps 2 and 3 to find the value of the stock, P0.
 59

Illustration:
 60

ICP #6
The most recent annual (2012) dividend payment of Warren
Industries, a rapidly growing boat manufacturer, was $1.50
per share. The firm’s financial manager expects that these
dividends will increase at a 10% annual rate, g1, over the
next three years. At the end of three years (the end of 2015),
the firm’s mature product line is expected to result in a
slowing of the dividend growth rate to 5% per year, g2, for
the foreseeable future. The firm’s required return, rs, is 15%.

Compute the value of this stock.

61
 62

Let’s watch the Screen Recording of this entire ICP using the F/C App
 63

Shortened Version:

Year Cash Flows

1 D1

2 D2

3 D3

𝐷
𝑃3 =
𝑘 − 𝑔2

Let’s watch the Screen Recording of this using the F/C App
 64

FORMULA from EMF Text pg 240

 65

Sol’n to ICP #6 using Formula

 66

ICP #7 – P7-11 [PMF]

Newman Manufacturing is considering a cash
purchase of the stock of Grips Tool. During the
year just completed, Grips earned $4.25 per share
and paid cash dividends of $2.55 per share. Grips’
earnings and dividends are expected to grow at
25% per year for the next 3 years, after which they
are expected to grow at 10% per year to infinity.

Required: What is the maximum price per share

that Newman should pay for Grips if it
has a required return of 15% on
investments with risk characteristics
similar to those of Grips?
 67

Let’s watch the Screen Recording of this using the F/C App
 68

ICP #8
December 2014 Question 3c
Aadam Company Limited has projected
the growth of his company at 15% over the
next 4 years. However, after this period
sustainable growth rate will fall to 4% and is
expected to remain at that level. Last
year’s dividend was $1.15 and the current
discounting rate is 8%.

Required:
Calculate the current stock price.
 69

Year Cash Flows

1 D1

2 D2

3 D3

4 D4

𝐷
𝑃4 =
𝑘 − 𝑔2

Let’s watch the Screen Recording of this using the F/C App
 STOCK
VALUATION
Part III
KRM

70
IMPORTANT NOTICE TO STUDENTS
You are hereby prohibited from reproducing, re-
publishing, re-broadcasting, re-posting, re-
transmitting or transferring in whole or in part any
Course Outlines, Course Materials or Lectures
which have been provided to you as part of your
course of study at The University of the West Indies
(The UWI), without the prior permission of The UWI,
its authorised agents or copyright holders.

71
 72

Key Objectives – Part III

 Discuss alternatives to the Dividend
Valuation Model

 Explain the relationships among financial

decisions, return, risk and the firm’s value.
Other Common Stock Valuation Methods:
1) Free Cash Flow Valuation Model
A free cash flow valuation model determines the value of an entire
company as the present value of its expected free cash flows discounted
at the firm’s weighted average cost of capital, which is its expected
average future cost of funds over the long run.

VC = value of the entire company

FCFt = free cash flow expected at the end of year t end of year t
ra = the firm’s weighted average cost of capital
7-73
 Other Common Stock Valuation Methods:
1) Free Cash Flow Valuation Model (cont.)

Because the value of the entire company, VC, is the

market value of the entire enterprise (that is, of all
assets), to find common stock value, VS, we must
subtract the market value of all of the firm’s debt,
VD, and the market value of preferred stock, VP, from
VC.

VS = VC – VD – VP
7-74
 75

ICP #9 – P7-15 [PMF]

 76

Solution (a)

0 1 2 3 4 5

Let’s watch the Screen Recording of this using the F/C App
 77

Solutions (b) & (c)

VEntire Company:

A = L + E

VEnt = VCS + VPS + VD

VCS = VEnt - VPS - VD

Common Stock Valuation:
Other Approaches to Stock Valuation
2) Book value per share is the amount per share of common stock
that would be received if all of the firm’s assets were sold for their
exact book (accounting) value and the proceeds remaining after
paying all liabilities (including preferred stock) were divided
among the common stockholders.
• This method lacks sophistication and can be criticized on the
basis of its reliance on historical balance sheet data.
• It ignores the firm’s expected earnings potential and generally
lacks any true relationship to the firm’s value in the marketplace.

7-78
Common Stock Valuation:
Other Approaches to Stock Valuation (cont.)

3) Liquidation value per share is the actual amount per

share of common stock that would be received if all of the
firm’s assets were sold for their market value, liabilities
(including preferred stock) were paid, and any remaining
money were divided among the common stockholders.
• This measure is more realistic than book value because it
is based on current market values of the firm’s assets.
• However, it still fails to consider the earning power of
those assets.

7-79
Common Stock Valuation:
Other Approaches to Stock Valuation (cont.)

• The price/earnings (P/E) ratio reflects the

amount investors are willing to pay for each
dollar of earnings.
4) The price/earnings multiple approach is a
popular technique used to estimate the firm’s share
value; calculated by multiplying the firm’s
expected earnings per share (EPS) by the average
price/earnings (P/E) ratio for the industry.

7-80
Figure 7.3
Decision Making and Stock Value

7-81
Decision Making and Common Stock
Value: Changes in Expected Dividends
• Assuming that economic conditions remain stable,
any management action that would cause current
and prospective stockholders to raise their dividend
expectations should increase the firm’s value.
• Therefore, any action of the financial manager that
will increase the level of expected dividends without
changing risk (the required return) should be
undertaken, because it will positively affect owners’
wealth.
7-82
Decision Making and Common Stock Value:
Changes in Expected Dividends (cont.)

Example:
Assume that Lamar Company announced a major technological
breakthrough that would revolutionize its industry. Current and
prospective stockholders expect that although the dividend next
year, D1, will remain at $1.50, the expected rate of growth
thereafter will increase from 7% to 9%.
𝐷1
𝑃0 =
𝑘 −𝑔

At 7% :

At 9% :
7-83
Decision Making and Common
Stock Value: Changes in Risk
• Any measure of required return consists of two components: a risk-free rate
and a risk premium. We expressed this relationship as in the previous
chapter, which we repeat here in terms of rs:

• Any action taken by the financial manager that increases the risk
shareholders must bear will also increase the risk premium required by
shareholders, and hence the required return.
• Additionally, the required return can be affected by changes in the risk free
rate—even if the risk premium remains constant.
7-84
 Decision Making and Common Stock
Value: Changes in Risk (cont.)
Example cont’d:
Assume that Lamar Company manager makes a decision that,
without changing expected dividends, causes the firm’s risk
premium to increase to 7%. Assuming that the risk-free rate
remains at 9%, the new required return on Lamar stock will be 16%
(9% + 7%).

𝐷1
𝑃0 = Original P0 = $18.75 (when k – 15%)
𝑘 −𝑔

At k = 16% :

7-85
Decision Making and Common
Stock Value: Combined Effect
Example cont’d:
If we assume that the two changes illustrated for Lamar Company in
the preceding examples occur simultaneously, the key variable values
would be D1 = $1.50, rs = 0.16, and g = 0.09.
𝐷1
𝑃0 = Original P0 = $18.75 (when k = 15% & g = 7%)
𝑘 −𝑔

At k = 16% & g = 9% :

7-86