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Harlamova29_29 [7]
3 years ago
13

A firm pays a current dividend of $1, which is expected to grow at a rate of 5% indefinitely. If the current value of the firm’s

shares is $35, what is the required return applicable to the investment based on the constant-growth dividend discount model (DDM)? (Do not round intermediate calculations.)
Business
1 answer:
ArbitrLikvidat [17]3 years ago
6 0

Answer:

Required rate of return = 8%

Explanation:

<em>The price of a stock using the dividend valuation model is the present value of the the future dividend expected from the stock discounted at the required rate of return. </em>

This model is represented as follows

D(1+g)/(r-g) = P

Price, D- dividend payable in now, ke- required rate of return, g- growth rate

35 = 1×(1.05)/ke-0.05

35 × (ke-0.05) = 1.05

35ke - 1.75 = 1.05

35Ke = 1.05 + 1.75

35ke = 2.8

ke= 2.8/35= 0.08

Ke = 0.08× 100 = 8%

Required rate of return = 8%

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=\frac{15}{20}

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Therefore, coefficient of elasticity of supply is 0.75. Since it is less than 1 we can infer that supply for this good is relatively inelastic.

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3 years ago
ABC Corporation has E &amp; P of $240,000. It distributes land with a fair market value of $70,000 (adjusted basis of $25,000) t
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Answer: Paul has a taxable dividend of $15,000.

Explanation:

From the question, we are informed that ABC Corporation has E & P of $240,000 and distributes land with a fair market value of $70,000 (adjusted basis of $25,000) to its sole shareholder, Paul. We are further informed that the land is subject to a liability of $55,000.

The taxable dividend will be the difference between the fair market value of land and the liability on the land. This will be:

= $70,000 - $55,000

= $15,000

Therefore, Paul has a taxable dividend of $15,000.

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On January 1, Year 1, the Mahoney Company borrowed $164,000 cash from Sun Bank by issuing a five-year 8% term note. The principa
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Answer:

Principal payment =  $27,505.00  

Explanation:

<em>Loan Amortization: A loan repayment method structured such that a series of equal periodic installments will be paid for certain number of periods to offset both the loan principal amount and the accrued interest.</em>

The principal repayment in year 1 = Annual payment - Interest payment in year 1

<em>Interest payment in year = Interest rate × Principal Amount</em>

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Principal payment = $40,635 - 13,120 =  $27,505.00  

Principal payment =  $27,505.00  

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