1answer.
Ask question
Login Signup
Ask question
All categories
  • English
  • Mathematics
  • Social Studies
  • Business
  • History
  • Health
  • Geography
  • Biology
  • Physics
  • Chemistry
  • Computers and Technology
  • Arts
  • World Languages
  • Spanish
  • French
  • German
  • Advanced Placement (AP)
  • SAT
  • Medicine
  • Law
  • Engineering
Citrus2011 [14]
3 years ago
8

Consider the following three stocks. (a) Stock A is expected to provide a dividend of $10 a share forever. (b) Stock B is expect

ed to pay a dividend of $5 next year. The dividend growth is expected to be 4% per year forever. (c) Stock C is expected to pay a dividend of $5 next year. The dividend is expected to grow by 20% annually for 5 years (i.e., until year 6) and then become zero forever. If the discount rate for each stock is 10 %, which stock is the most valuable?
Business
1 answer:
Archy [21]3 years ago
3 0

Answer:

The stock A is most valuable as the fair value of Stock A is $100 which is more than the fair value of Stock B ( $83.33) and Stock C ($34.28).

Explanation:

to calculate the fair price of the stocks, we will use the DDM or dividend discount model. The DDM bases the value of a stock on the present value of the expected future dividends from the stock.

Let r be the discount rate which is 10%.

a.

The stock is like a perpetuity as it pays a constant dividend after equal intervals of time and for an indefinite period.

The price of this stock can be calculated as,

Price or P0 =  Dividend / r

P0 = 10 / 0.1  = $100

b.

The constant growth model of DDM can be used to calculate the price of this stock as its dividends are growing at a constant rate forever.

P0 = D1 / r - g

Where,

  • D1 is the dividend for the next period
  • r is the cost of equity or discount rate
  • g is the growth rate in dividends

P0 = 5 / (0.1 - 0.04)

P0 = $83.33

c.

The price of this stock can be calculated using the present of dividends.

P0 = 5 / (1+0.1)  +  5 * (1+0.2) / (1+0.1)^2  +  5 * (1+0.2)^2 / (1+0.1)^3  +  

5 * (1+0.2)^3 / (1+0.1)^4  +  5 * (1+0.2)^4 / (1+0.1)^5  +  5 * (1+0.2)^5 / (1+0.1)^6

P0 = $34.28

You might be interested in
If an investor's holding period is longer than the term to maturity of a bond, he or she is exposed to___________ A) interest-ra
Zigmanuir [339]

Answer:              

option B

Explanation:

Reinvestment risk refers to the possibility that potential cash flow will have to be invested in low-yielding assets, like coupons (the annual interest charges on the bond) or the eventual returns of the investment.

Reinvestment risk refers to one of financial risk's primary styles. The term is used to describe the threat of anyone canceling or stopping a particular investment, which one might need to find another place to reinvest the cash with the risk of not getting an equally attractive prospect.

Thus, from the above we can conclude that correct option is B .            

7 0
3 years ago
The accounts of Melissa Manufacturing showed the following balances at the beginning of​ December: Account Debit Raw Materials I
Rudik [331]

Answer:

$115,000

Explanation:

Data provided as per the question is below:-

Beginning balance = $81,000

Direct material issued = $27,000

Direct labor incurred = $7,000

The computation balance Process Inventory is shown below:-

Balance in the​ Work-in-Process Inventory = Beginning balance + Direct material issued + Direct labor incurred

= $81,000 + $27,000 + $7,000

= $115,000

4 0
3 years ago
Which of the following is not a type of consumer credit?
Masteriza [31]
Automobile loans is not a type of consumer credit
8 0
3 years ago
Read 2 more answers
At the beginning of the current year, Snell Co. total assets were $264,000 and its total liabilities were $182,200. During the y
larisa [96]

Answer:

The company's debt ratio at the end of the current year is 66%

Explanation:

For computing the debt ratio, we need to apply the formula which is shown below:

Debt ratio = (Total liabilities) ÷ (total assets) × 100

                = ($182,200 ÷ $276,000) × 100

                = 66%

The other information which are given in the question is of no use. That's why we do not consider it. Hence, ignored it.  

7 0
3 years ago
Number one victory Royale yeah fork knife we about to get down get down 10 kills on the board right now oh no my just got downed
Sav [38]

Answer:

Now we're in the Pleasant Park streets

Look at the map, go to the marked sheet

3 0
3 years ago
Other questions:
  • Fair Oaks Farms’ manure management, specifically the use of cow manure to power their facilities and fuel their milk tankers, is
    11·1 answer
  • The vice president wrote a letter to the employees announcing the opening of a new production facility. this is an example of wh
    7·1 answer
  • A country that currently does not trade with other countries could benefit by a. not restricting trade. b. restricting both impo
    9·1 answer
  • Assuming that monthly returns are approximately normally distributed, what is the probability that this market-neutral strategy
    6·1 answer
  • The International Property Right Index scores countries based on the legal and political environment and how well property right
    11·1 answer
  • Arturo is a sales manager for the bratney companies, a company that manufactures equipment used in the processing of grains and
    12·1 answer
  • owns a Dell laptop computer. She uses the computer in class and her classmates can see the Dell logo when she uses her laptop. O
    8·1 answer
  • The fish in the river are consideredrival in consumption andexcludable whereas the fish in the private pond are and . In other w
    7·1 answer
  • The Card Shoppe needs to maintain 21 percent of its sales in net working capital. Currently, the store is considering a four-yea
    9·1 answer
  • The material wealth of a society is a function of? all financial assets. all real assets. all financial and real assets. all phy
    7·1 answer
Add answer
Login
Not registered? Fast signup
Signup
Login Signup
Ask question!