The interest rate charged on overnight loans of reserves between banks is A) federal funds rate. B) prime rate. C) Treasury bill
1 answer:
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Answer:
Case 1
Price of share = $14.21
Case 2
Price of share = $44.17
Explanation:
Provided details,
We have the following,
Current dividend = $1.35
Growth rate = 0
Annual rate of return = 9.5%
Using dividend growth model value of share,
Where D1 = Dividend at year end
Ke = Cost of capital or expected return
P0 = price of share
g = growth rate
Thus P0 = = $14.21
In case 2, we have,
Dividend per share = $6.00 For a period of 9 years
Expected return = 11%
Growth rate = 0
Sale price at end of year 9 = $28
Present value annuity factor for 9 year @ 11%
= 5.537
Present value of Dividend = $6 5.537 = $33.22
Discounted value of $28 for 9 years = 0.391 {tex]\times[/tex] $28 = $10.95
As, the share will be sold after 9 years, the price will be discounted to current value.
Total present value of share = $44.17
Thus, current price = $44.17
Case 1
Price of share = $14.21
Case 2
Price of share = $44.17