Question

The Goliath Inc. decides to pay the following dividends over the next three years: $2, $2.6, and $3.38. Thereafter, the company will maintain a constant 10% growth rate in dividends forever. The required return of Goliath’s stock is 15%. Suppose Victor has $1000 today. He decides to buy 10 shares of Goliath’s stock today and save the rest of his $1000 into the Whales Cargo bank, which provides an annual interest rate of 6%. Victor will sell his shares of Goliath’s stock in year 3 and withdraw the money from the bank as well. Victor wants to know how much money he can have in year 3, with such an investment plan.
What is the stock price of Goliath Inc. today?

How much money can Victor save in the bank today?

What is the stock price (per share) of Goliath Inc. when Victor sells it in year 3 (immediately after the third dividend is paid out)?

How much money can Victor withdraw from the bank in year 3?

With such an investment plan, how much money will Victor have in year 3? Suppose Victor consumes all his dividends over these years and his wealth consists of the capital gains from the stock and the money withdrawal from the bank.

Answer 1

Answer:

The solution and complete explanation for the above question and mentioned conditions is given below in the attached document.i hope my explanation will help you in understanding this particular question.

Explanation:

Answer 2

Answer:

1) $ 54.82

2)  it will invest 451.80 dollars in the bank account

3) $74.36

4) $ 1.281,7‬

Explanation:

We solve for the current price of Goliath using the dividend growhth model:

$\left[\begin{array}{ccc}Years&Cashflow&Discounted\\&&\\1&2&1.74\\2&2.6&1.97\\3&3.38&2.22\\3&74.36&48.89\\&total&54.82\\\end{array}\right]$

After the third dividned the value of the future dividends growing at 10% is calcualte using the gordon model:

$\frac{D_1}{r-g} = PV\\\frac{D_0(1+g)}{r-g} = PV$

3.38(1+0.10)/(0.15-0.1) = 74.36

Then we discount using the lump sum formula:

$\frac{dividend}{(1 + rate)^{time} } = PV$

we use the rate of 15% which is the required return

10 shares x 54.82 = 548.2

1,000 - 548.2 = 451.8

At the third dividend is paid out the value of the shares will be of 74.36 as it is the discounted value of the futures dividends growing at 10%

10 shares x 74.36 = $743.6

451.8 capitalized during 3 years at 6%

$Principal \: (1+ r)^{time} = Amount$

Principal 451.80

time 3.00

rate 0.06000

$451.8 \: (1+ 0.06)^{3} = Amount$

Amount 538.10

Total: 538.10 + 743.6 = 1.281,7‬