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LenaWriter [7]
3 years ago
9

Consider the following three stocks: Stock A is expected to provide a dividend of $10 a share forever. Stock B is expected to pa

y a dividend of $5 next year. Thereafter, dividend growth is expected to be 4% a year forever. Stock C is expected to pay a dividend of $5 next year. Thereafter, dividend growth is expected to be 20% a year for five years (i.e., years 2 through 6) and zero thereafter. If the market capitalization rate for each stock is 10%, which stock is the most valuable?
Business
1 answer:
amid [387]3 years ago
8 0

Answer:

Value of stock =$100

Value of stock B=$83.33

Value of stock C = $104.51

Explanation:

Stock A

A dividend of $10 a share forever is a perpetuity.

PV of a perpetuity =\frac{CF}{ke}

where CF is the cash-flow expected per compounding period = $10

            ke=return on investment or market capitalization rate=0.1

Value of stock A = \frac{10}{0.1} =$100

Stock B

Given D1=$5, g = 4% forever- this stream of cash-flows can be valued using the constant growth model where

PV=\frac{D_1}{ke-g}

where D1 is the dividend expected at the end of year 1 = $5

             ke is the return on investment or market capitalization rate = 0.1

             g is the growth rate = 0.04

Value of stock B= \frac{5}{0.1-0.04} = $83.33

Stock C

The stock dividends  have two distinct growth periods, the 1st 6 years where g= 20% and after that, zero growth

Price of the stock C = \frac{D1}{(1+ke)^1}+\frac{D2}{(1+ke)^2}+\frac{D3}{(1+ke)^3}+\frac{D4}{(1+ke)^4}+\frac{D5}{(1+ke)^5}+\frac{D6}{(1+ke)^6}+\frac{P6}{(1+ke)^6}

where P6= \frac{D7}{ke}=\frac{D6}{ke}

Price of the stock C = \frac{5}{(1+0.1)^1}+\frac{5(1.2)}{(1+0.1)^2}+\frac{5(1.2)^2}{(1+0.1)^3}+\frac{5(1.2)^3}{(1+0.1)^4}+\frac{5(1.2)^4}{(1+0.1)^5}+\frac{5(1.2)^5}{(1+0.1)^6}+\frac{5(1.2)^5}{0.1*(1+0.1)^6}

= 34.2755+\frac{5(1.2)^5}{0.1*(1+0.1)^6} =$104.51

Stock C is more valuable as it has a higher present value of cash flows.

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Your Godmother left you an inheritance of ​$100,000​, payable to you when you turn 26 years old. You are now 21.​ Currently, the
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Answer:

The offer should be accepted

Explanation:

It is known that the amount $100,000 will be paid to someone when he turns 26 years. The current age is 21 years.

the 5-years bond is given 3.1 percent of interest rate.

another option for the person is offered $103,021.02 right away which is the present value.

The present value of the $100,000 that is going to be received after 5 years is calculated as follows;

Present value =  Amount to be received /(1+interest rate/100)^t

                        = 100,000/(1+ 3.1/100)⁵

                         = 100,000/ 1.031⁵

                         = $85,843.35

Therefore, the present value is $85,843.35 for the amount $100,000 to be receive after five years.

Since the amount  $103,012.02 he was offered is greater than the present value of his inheritance after 5-years, the person should accept the offer  and forget about the inheritance of $100,000.

6 0
3 years ago
Suppose a firm has an annual budget of $200,000 in wages and salaries, $75,000 in materials, $30,000 in new equipment, $20,000 i
Schach [20]

Answer:

The firm earns revenues of $360,000 per year. To receive a normal profit, the firm described above would have to earn additional revenue of $90,000

Explanation:

As per the information provided in the question, the current profit/loss after deducting all expenditure from income is as follows:

Particular                                     Amount ($)

Revenue                                      360,000

Less: Wages and Salaries          (200,000)

Less: Materials                             (75,000)

Less: New Equipment                  (30,000)

Less: Rented Property                 (20,000)

Less: Interest Costs                      (35,000)

Profit/Loss                                           0

As confirmed from the calculation above currently no profit is being earned even after the owner/manager not receiving income from the firm. Therefore, the firm should generate additional revenue of $90,000 in order to earn normal profit.

8 0
3 years ago
A firm have an inventory turnover of 5 times a year on a cost of goods sold of $800 000.if the firm improves the inventory turno
Lunna [17]

Answer:

d) $60,000 is released into working capital

Explanation:

Inventory turnover is the number of times that a firm buys and sells inventory. A high inventory means that the company sells its stock many times in a year.

the formula for inventory turnover ratio

=Cost of goods sold/ average inventory

If a firm has COGS of $800,000 and an inventory turnover of 5, then the average inventory will be

=$800,000 /5

=$160,000

If the firm improves its  turnover to 8, then the average inventory will be

=$800,000/8

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The firm average inventory will  $100,000 as opposed to $160,000 previously.

$60,000  will be released to working capital.

3 0
3 years ago
Which of the following statements is CORRECT? a. Because most stock ownership is concentrated in the hands of a relatively small
lbvjy [14]

Answer:

d. The potential exists for agency conflicts between stockholders and managers.

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Scrat [10]

Answer:

Jerry's gain on the sale= $28,500

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When Jerry sells his interest in JJM to Lucia his basis ($54,250) is what he owes and will be taken out of the proceeds he will get for selling his interest in the company.

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Jerry's gain on the sale= 82,750- 54,250

Jerry's gain on the sale= $28,500

6 0
4 years ago
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