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exis [7]
3 years ago
5

In practice, a common way to value a share of stock when a company pays dividends is to value the dividends over the next five y

ears or so, then find the "terminal" stock price using a benchmark PE ratio. Suppose a company just paid a dividend of $1.17. The dividends are expected to grow at 12 percent over the next five years. The company has a payout ratio of 40 percent and a benchmark PE of 19. The required return is 12 percent. What is the target stock price in five years?
What is the stock price today?
Business
1 answer:
svlad2 [7]3 years ago
3 0

Answer:

Stock Price in 5 years: $97.94. Stock Price Today: $55.575

Explanation:

A pay-out ratio is computed by dividing dividends per share over earnings per share. Meanwhile, PE or Price-Earnings Ratio is computed by dividing the market value of stocks over earnings per share. Thus, using the pay-out ratio formula, the earnings per share is 2.925 ($1.17/40%) and using the PE ratio formula, the market price of stocks today is $55.575 (19 x 2.925). After 5 years, multiplying 1.17 and 12% rate raised to the 5th power, the dividend will amount to $5.1548. Using pay-out ratio, earnings per share is 5.1548 ($2.0619/40%) and the market price of stock after 5 years is $97.94 ($5.1548 x 19).

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The ACME manufacturing company is weighing its options to source Component X. Supplier A would cost $3000 per order plus $2.50 f
raketka [301]

Question Completion:

Since the options are not provided, it is assumed that ACME requires 2,000 units of Component X monthly.  Which supplier should the company choose?

Answer:

ACME Manufacturing Company

The supplier that should be chosen is:

Supplier A.

Explanation:

a) Data and Calculations:

Quantity of component X required monthly = 2,000 units

Cost of buying from supplier A = $3,000 + ($2.50 * 2,000) = $8,000

Cost of buying from supplier B = $6 * 2,000 = $12,000

Cost of buying from supplier C = $5 * 2,000 = $10,000

b) This cost decision depends on the quantity of component X required by ACME manufacturing.  If the quantity were to be less than or equal to 1,100 units, another supplier other than supplier A might be preferred.  Again, if there are other considerations apart from cost, supplier A might not be chosen.  The implication is that the choice of a supplier for a component depend on many factors.

8 0
3 years ago
Sara spends $25 for an all-day ticket to an amusement park. After one ride, it begins to rain and she wishes she had never come.
iren2701 [21]

Answer:

False.

Explanation:

False, it is given that Sara spends $25 for all-day ticket in the amusement park. However, this is a shuck cost that she can not recover. Moreover, she has taken one ride so marginal analysis shows that all his $25 is not wasted. She has utilized some portion of their money so we can not say that she has wasted all his money.

7 0
3 years ago
What is the dividend on an 8 percent preferred stock that currently sells for $45 and has a face value of $50 per share?
topjm [15]

The dividend of a stock would always depend on the face value of the share. Therefore the dividend is calculated by:

Dividend = (Face Value) * (Interest rate)

Dividend = $50 per share * 0.08

<span>Dividend = $4 per share                                (ANSWER)</span>

7 0
3 years ago
Which of the following would NOT cause a shift in supply? A. changes in the price of inputs B. changes in the price of other goo
adell [148]

Answer:

C.

Explanation:

<em>The correct answer would be changes in consumer input.</em>

The supply of a good can be influenced by changes in the price of inputs for that goods, changes in the price of substitute goods, as well as changes in technology that positively or negatively affect the production of such goods.

What will not affect the supply of any good is changes to consumer's input. An input generally referred to a substance that is required to produce an output. Unless the consumer of a good is also the producer of that good, a consumer's input will not impact the supply of a product.

The correct option is C.

4 0
3 years ago
ROI, Residual Income, and EVA with Different Bases Envision Company has a target return on capital of 12 percent. The following
lara [203]

Answer:

a. ROI = income / Assets      

                                      Book Value       Current Value    

Software Division              0.175              0.13    

Consulting Division           0.164              0.182    

Venture Capital Division   0.093            0.088

<u>Workings:</u>

i. Book value

Software Division = 12,250/70,000=0.175

Consulting Division = 16,400/100,000=0.164  

Venture Capital Division = 56,730/610,000 =0.093

ii. Current value

Software Division = 11,700/90,000=0.13

Consulting Division = 20,020/110,000=0.182

Venture Capital Division= 51,920/ 590,000=0.088

b. Residual income = Income - {Asset x Return on capital 12% }

                                      Book Value       Current Value    

Software Division              3850              900    

Consulting Division           4400              6820    

Venture Capital Division   -16470           -18880

<u>Workings:</u>

i. Book value

Software Division = 12,250-(70,000*12%)=3850

Consulting Division = 16,400-(100,000*12%)=4400  

Venture Capital Division = 56,730-(610,000*12%) =-16470

ii. Current value

Software Division = 11,700-(90,000*12%)=900

Consulting Division = 20,020-(110,000*12%)=6820

Venture Capital Division= 51,920-(590,000*12%)=-18880

c. Economic Value Added ( EVA ) = Net Income After Tax - ( Amount of Capital x Weighted Average Cost of Capital [WACC] )

C.                     Software Division  

                            (Value Base)  

                                    Book            Current

Sales                           100,000          100,000

Income                          12,250           11,700

Assets                           70,000          90,000

Liabilities                      10,000           10,000

Capital invested           60,000          80,000

(Asset - Liabilities)

Tax on Income(30%)     3675            3510

Income after Tax            8,575           8,190

(Income - Tax on

income) (A)

Capital invested             6,000           8,000

* WACC - 10% ) (B)

EVA (C)=(A)-(B)                2,575            190

                       Consulting Division

                            (Value Base)

                                     Book            Current

Sales                         200,000        200,000

Income                        16,400           20,020

Assets                         100,000        110,000

Liabilities                      14,000         14,000

Capital invested           86,000       96,000

(Asset - Liabilities)

Tax on Income(30%)     4920            6006

Income after Tax           11,480           14,014

(Income - Tax on

income) (A)

Capital invested           8,600            9,600

* WACC - 10% ) (B)

EVA (C)=(A)-(B)              2,880            4,414

                     Venture Capital Division

                           (Value Base)

                                   Book            Current

Sales                        800,000       800,000

Income                      56,730          51,920

Assets                       610,000        590,000

Liabilities                    40,000         40,000

Capital invested        570,000        550,000

(Asset - Liabilities)

Tax on Income(30%)    17019          15576

Income after Tax          39,711         36,344

(Income - Tax on

income) (A)

Capital invested           57,000       55,000

* WACC - 10% ) (B)

EVA (C)=(A)-(B)              -17,289       -18,656

8 0
3 years ago
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