Walter’s dividend is expected to grow at a constant growth rate of 6.50% per year. What do you expect to happen to Walter’s expe
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Answer:
Yes, you would be interested in buying the stock at $20 because it's underpriced. It's actual intrinsic value is $23.76
Explanation:
Use dividend discount model to solve this question;
D1 = 2.75(1-0.10) = 2.475
D2 = 2.475 (1-0.10) = 2.228
D3 =2.228 (1-0.10) = 2.005
D4 = 2.005(1-0.10) = 1.805
D5 = 1.805(1+0.05) = 1.895
Next, find the Present values of each dividend;
PV (D1) = 2.475 /1.12 = 2.2098
PV (D2) = 2.228/1.12² = 1.7761
PV (D3) = 2.005/1.12³ = 1.4271
PV (D4) = 1.805/1.12^4 = 1.1471
Next find PV of constant growing dividends
PV (D5 onwards) =
PV (D5 onwards) = 17.2044
Next, sum up these PVs to find the price of the stock;
2.2098 + 1.7761 + 1.4271 + 1.1471 + 17.2044 = $23.76
Yes, you would be interested in buying the stock at $20 because it's underpriced. It's actual intrinsic value is $23.76
Answer:
NPV with a 14.9% discount rate: 6,329.06
The toy should be produced as the NPV is positive.
IRR = 26.65%
Explanation:
First we calculate for the NPV using the given discount rate of 14.9%
We will calculate the present value of each year cash inflow:
Year 1 cash inflow: 47,500.00
time 1.00
rate 0.149
PV 41,340.30
Year 2 cash inflow: 18,600.00
time 2.00
rate 0.149
PV 14,088.76
Then, we add them and subtract the investment to get NPV
NPV = 14,088.76 + 41,340.3 - 49,100 = 6,329.06
The toy should be produced as the NPV is positive.
Now for the IRR
That is the rate at which NPV equals zero we can solve for this using the quadratic equation as there are only two cash flow:
Year 1 will discount at (1+IRR)
Year 2 will be discount at (1+IRR )^2
So we can express and recreate the quadratic formula:
18,600 X^2 + 47,500 X - 49,500 = 0
A = 18,600
B = 47,500
C = -49,100
We can solve and get:
x1 = 0.78957
x2 = -3.3433
We take the positive value.
and now solve for IRR
IRR = 0,2665121 = 26.65%
This will be the IRR for the project.