huck Ponzi has talked an elderly woman into loaning him $30 comma 000 for a new business venture. She has, however, successful
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Answer:
a) With a 7% return, the current stock price = $34.67.
b) The current stock price = $17.33, with a 10% return.
c) The current stock price = $14.86, with a 11% return.
d) The current stock price = $9.45, with a 15% return.
e) Current stock price = $7.43 assuming the interest rate is 18%
Explanation:
Requirement A
An investor wants a return of 7%,
We know,
Dividend-growth model, stock price, =
÷ (
- g)
Here,
= Today's stock price = ?
= 7% = 0.07
g = growth rate = 4% = 0.04
= Next year dividend =
= $0.50 × (1 + 0.04) = $0.50 × 1.04 = $0.52
Putting the values into the above formula, we can get,
=
÷ (
- g)
= $1.04 ÷ (0.07 - 0.04)
or, = $1.04 ÷ 0.03
Hence with a 7% return, the current stock price = $34.67.
Requirement B
An investor wants a return of 10%,
We know,
Dividend-growth model, stock price, =
÷ (
- g)
Here,
= Today's stock price = ?
= 10% = 0.10
g = growth rate = 4% = 0.04
= Next year dividend =
= $0.50 × (1 + 0.04) = $0.50 × 1.04 = $0.52
Putting the values into the above formula, we can get,
=
÷ (
- g)
= $1.04 ÷ (0.10 - 0.04)
or, = $1.04 ÷ 0.06
Hence the current stock price = $17.33, with a 10% return.
Requirement C
An investor wants a return of 11%,
We know,
Dividend-growth model, stock price, =
÷ (
- g)
Here,
= Today's stock price = ?
= 11% = 0.11
g = growth rate = 4% = 0.04
= Next year dividend =
= $0.50 × (1 + 0.04) = $0.50 × 1.04 = $0.52
Putting the values into the above formula, we can get,
=
÷ (
- g)
= $1.04 ÷ (0.11 - 0.04)
or, = $1.04 ÷ 0.07
Hence the current stock price = $14.86, with a 11% return.
Requirement D
An investor wants a return of 15%,
We know,
Dividend-growth model, stock price, =
÷ (
- g)
Here,
= Today's stock price = ?
= 15% = 0.15
g = growth rate = 4% = 0.04
= Next year dividend =
= $0.50 × (1 + 0.04) = $0.50 × 1.04 = $0.52
Putting the values into the above formula, we can get,
=
÷ (
- g)
= $1.04 ÷ (0.15 - 0.04)
or, = $1.04 ÷ 0.11
Hence the current stock price = $9.45, with a 15% return.
Requirement E
An investor wants a return of 18%,
We know,
Dividend-growth model, stock price, =
÷ (
- g)
Here,
= Today's stock price = ?
= 18% = 0.18
g = growth rate = 4% = 0.04
= Next year dividend =
= $0.50 × (1 + 0.04) = $0.50 × 1.04 = $0.52
Putting the values into the above formula, we can get,
=
÷ (
- g)
= $1.04 ÷ (0.18 - 0.04)
or, = $1.04 ÷ 0.14
Hence the current stock price = $7.43, with a 18% return.