【正文】 500The value of the firm (., debt plus equity) is:Since the value of the debt is $4 million, the value of the equity is $10,550,000.20. a. g = ROE 180。 = $ (The new growth rate is 6%.)YearReturn12 3Moral: In normal periods when there is no special information, the stock return = k = 15%. When special information arrives, all the abnormal return accrues in that period, as one would expect in an efficient market.CFA PROBLEMS1. a. This director is confused. In the context of the constant growth model[., P0 = D1/ k – g)], it is true that price is higher when dividends are higher holding everything else including dividend growth constant. But everything else will not be constant. If the firm increases the dividend payout rate, the growth rate g will fall, and stock price will not necessarily rise. In fact, if ROE k, price will fall.b. (i) An increase in dividend payout will reduce the sustainable growth rate as less funds are reinvested in the firm. The sustainable growth rate (. ROE 180。 = $E2 = E0 ()2 = $ 180。 ()2 180。 = $ 180。*Projected 2013 terminal value = (Projected 2014 FCFE)/(r g)?Projected 2013 Total cash flows to equity = Projected 2013 FCFE + Projected 2013 terminal value?Discounted values obtained using k= 14%167。s earnings: P/E = payout ratio/(k g) = ( ) = b. The P/E ratio is a decreasing function of riskiness。 g = %b. Use of the Gordon growth model would be inappropriate to value Dynamic’s mon stock, for the following reasons:i. The Gordon growth model assumes a set of relationships about the growth rate for dividends, earnings, and stock values. Specifically, the model assumes that dividends, earnings, and stock values will grow at the same constant rate. In valuing Dynamic’s mon stock, the Gordon growth model is inappropriate because management’s dividend policy has held dividends constant in dollar amount although earnings have grown, thus reducing the payout ratio. This policy is inconsistent with the Gordon model assumption that the payout ratio is constant.ii. It could also be argued that use of the Gordon model, given Dynamic’s current dividend policy, violates one of the general conditions for suitability of the model, namely that the pany’s dividend policy bears an understandable and consistent relationship with the pany’s profitability.7. a. The industry’s estimated P/E can be puted using the following model:However, since k and g are not explicitly given, they must be puted using the following formulas:gind = ROE 180。 ) = Therefore: b. i. Forecast growth in real GDP would cause P/E ratios to be generally higher for Country A. Higher expected growth in GDP implies higher earnings growth and a higher P/E.ii. Government bond yield would cause P/E ratios to be generally higher for Country B. A lower government bond yield implies a lower riskfree rate and therefore a higher P/E.iii. Equity risk premium would cause P/E ratios to be generally higher for Country B. A lower equity risk premium implies a lower required return and a higher P/E.8. a. k = rf + β (kM – rf) = % + (% %) = 16%b.YearDividend2009$2010$ 180。 180。 there was no new borrowing during the year.Adjustment: negative $5 millionThe unscheduled debt repayment cash flow (–$5 million) is an amount no longer available to equity holders and should be subtracted from net ine to determine FCFE.Note 4: On January 1, 2013, the pany received cash from issuing 400,000 shares of mon equity at a price of $25 per share.No adjustmentTransactions between the firm and its shareholders do not affect FCFE. To calculate FCFE, therefore, no adjustment to net ine is required with respect to the issuance of new shares.Note 5: A new appraisal during the year increased the estimated market value of land held for investment by $2 million, which was not recognized in 2013 ine.No adjustmentThe increased market value of the land did not generate any cash flow and was not reflected in net ine. To calculate FCFE, therefore, no adjustment to net ine is required.c. Free cash flow to equity (FCFE) is calculated as follows:FCFE = NI + NCC – FCINV – WCINV + Net borrowingwhere: NCC = Noncash chargesFCINV = Investment in fixed capitalWCINV = Investment in working capitalMillion $ExplanationNI =$From Table 18GNCC =+$$ (depreciation and amortization from Table 18G) – $* (gain on sale from Note 2)FCINV =–$$ (capital expenditures from Note 1) – $* (cash on sale from Note 2)WCINV =–$–$ (increase in accounts receivable from Table 18F) +–$ (increase in inventory from Table 18F) +–$ (decrease in accounts payable from Table 18F)Net borrowing =+(–$)–$ (decrease in lo