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Drupady [299]
3 years ago
10

Simpkins Corporation does not pay any dividends because it is expanding rapidly and needs to retain all of its earnings. However

, investors expect Simpkins to begin paying dividends, with the first dividend of $0.75 coming 3 years from today. The dividend should grow rapidly - at a rate of 70% per year - during Years 4 and 5. After Year 5, the company should grow at a constant rate of 6% per year. If the required return on the stock is 13%, what is the value of the stock today (assume the market is in equilibrium with the required return equal to the expected return)
Business
1 answer:
raketka [301]3 years ago
4 0

Answer:

The current value of stock is $20.40

Explanation:

D3 = $0.75

The Growth rate for Year 4 & Year 5 is 70%. The experience after was constant growth rate (g) of 6%

D4 = $0.75 * 1.70 = $1.28

D5 = $1.28 * 1.70 = $2.18

D6 = $2.18 * 1.06 = $2.31

To get the Value of stock, r = 16%

P5 = D6 / (r - g)

P5 = $2.31 / (0.13 - 0.06)

P5 = $2.31 / 0.07

P5 = $33

P0 = $0.75/1.13^3 + $1.28/1.13^4 + $2.18/1.13^5 + $33/1.13^5

P0 = $0.75/1.4429 + $1.28/1.6305 + $2.18/1.8424 + $33/1.8424

P0 = $0.5198 + $0.7850 + $1.1832 + $17.9114

P0 = $20.3994

P0 = $20.40

So, current value of stock is $20.40

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3 years ago
7.37 For the net cash flow series, (a) determine the number of possible i* values using the two sign tests, (b) find the EROR us
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Answer:

The answer is 25.19% .

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Explanation:

<em>From the question given,</em>

<em>The first step is to make use of a table for the net cash flow series</em>

<em>Year                      1                  2                3              4             5             6</em>

<em>Net cash flow    $4100   $2000         $7000         $12000  $700       $800</em>

<em>Then,</em>

<em>Solution : MIRR is defined as modified internal rate of return, It accounts for the positive cash flows with reinvestment by using re-investment rate and negative cash flows are calculated at their present values to keep the fund aside by using finance rate. </em>

<em> As given also reinvestment rate = 20% and finance cost rate = 10%. </em>

<em> Now, from the table given of cash flows, we will calculate the future value of all cash flows in year 6. </em>

<em> FV = 4100*(1+0.20)^5 + 12000*(1+0.20)^2 + 800*(1+0.20)^0 = $28282.11 </em>

<em> Now,</em>

<em> By applying the rate of   we will computer teh PV of -ve cash flows : </em>

<em> PV = -2000/(1+0.1)^2 + -7000/(1+0.1)^3 + -700/(1+0.1)^5 = -$7346.73 </em>

<em> Now MIRR can be calculated by using the formula , MIRR = \√[n]{FV(positive cash flows/PV of negative cash flows)}-1 = \√[6]{28282.11/7346.74)}-1 </em>

<em> MIRR = 1.2519-1 = 0.2519 or 25.19% </em>

<em> Therefore, the only value Possible = 25.19% in this case.</em>

5 0
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Answer:

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