1answer.
Ask question
Login Signup
Ask question
All categories
  • English
  • Mathematics
  • Social Studies
  • Business
  • History
  • Health
  • Geography
  • Biology
  • Physics
  • Chemistry
  • Computers and Technology
  • Arts
  • World Languages
  • Spanish
  • French
  • German
  • Advanced Placement (AP)
  • SAT
  • Medicine
  • Law
  • Engineering
Lostsunrise [7]
3 years ago
10

Universal Laser, Inc., just paid a dividend of $3.10 on its stock. The growth rate in dividends is expected to be a constant 6 p

ercent per year, indefinitely. Investors require a 15 percent return on the stock for the first three years, a 13 percent return for the next three years, and then an 11 percent return thereafter. What is the current share price for the stock?
Business
1 answer:
Vadim26 [7]3 years ago
3 0

Answer:

Ans. The current price of the stock is $56.82

Explanation:

Hi, well, the problem here is that we have different discount rates, in other words the required rate of return for the stock changes several times, therefore we are going to break this problem in 3 parts, or bring to present value all the cash flows in 3 steps. Let´s start with the value of the dividends.

We have to use the following formula.

Dn=D_{(n-1)} *(1+g)

Where, D(n-1) is last dividend and Dn is the dividend that we are looking for, for example, D1 = 3.10*(1+0.06)=3.29, D2=3.29*(1+0.06)=3.48, and so forth. The amount to pay on dividends per share is,

D1=3.29; D2=3.48; D3=3.69; D4=3.91; D5=4.15; D6=4.40; D(7)=4.66

Since the first 3 years are to be discounted at a 15%, this is how the formula should look like.

PV(1)=\frac{D1}{(1+r(1))^{1} } +\frac{D2}{(1+r(1))^{2} } +\frac{D3}{(1+r(1))^{3} }

PV(1)=\frac{3.29}{(1+0.15)^{1} } +\frac{3.48}{(1+0.15)^{2} } +\frac{3.69}{(1+0.15)^{3} }=7.92

Now, for the second part, we have to bring all cash flows to year 3 at r(2)=13% and then bring it to present value at r(1)=15%. This is because we have 2 different discount rates, this is as follows.

PV(2)=(\frac{D4}{(1+r(2))^{1} } +\frac{D5}{(1+r(2))^{2} } +\frac{D6}{(1+r(2))^{3} })*\frac{1}{((1+r(1)^{3} }

PV(2)=(\frac{3.91}{(1+0.13)^{1} } +\frac{4.15}{(1+0.13)^{2} } +\frac{4.40}{(1+0.13)^{3} })*\frac{1}{(1+0.15)^{3} } =6.42

Finally, we need to bring all the future cash flows from year 7 and beyond, notice that we need to use the return rate r(3) to bring everything to year 6, then we have to bring it to year 3 and then to present value, everything as follows.

PV(3)=(\frac{D7}{(r(3)-g)} )*(\frac{1}{(1+r(2))^{3} } )*(\frac{1}{(1+r(1))^{3} } )

PV(3)=(\frac{4.66}{(0.11-0.06)} )*(\frac{1}{(1+0.13)^{3} } )*(\frac{1}{(1+0.15)^{3} } )=42.48

So, the price of the stock is PV(1) + PV(2) + PV(3), or:

Price=7.92+6.42+42.48=56.82

Price= $56.82/share

Best of luck.

You might be interested in
A mining company declared a liquidating dividend. The journal entry to record the declaration must include a debit to1. Retained
gregori [183]

Answer: Option (2)

Explanation:

Paid in capital is referred to as or known as amount of the capital which is paid in by the investors during the preferred or common stock issuance, including par value of shares in addition to the amount in excess of the par value. The paid in capital tends to represent funds which are raised by organization through selling of equity.

6 0
2 years ago
Allison, a long-time employee at aim corporation is helping william, a new employee; learn the culture of the organization. alli
Dmitrij [34]
Hello!

Q: Alison, a long-time employee at AIM Corporation is helping William, a new employee; learn the culture of the organization. Alison is using the _____________ process.

A: Alison, a long-time employee at AIM Corporation is helping William, a new employee; learn the culture of the organization. Alison is using the Socialization process.
8 0
3 years ago
"Which type of report would help the company study available options and how should it be organized?"
oksian1 [2.3K]

a yardstick report would be used. it would be organized indirectly, describing the problem, explaining alternatives, establishing criteria for comparison, evaluating each alternative in terms of the criteria, and making recommendations.

6 0
3 years ago
Which of the following groups are text effects in word
inn [45]

Answer:

salary

employement

Explanation:

4 0
3 years ago
__ is NOT considered a high risk investment.
hram777 [196]
B or D I believe I remember the question but it’s one of those 2
3 0
2 years ago
Other questions:
  • What is true for monopoly that is not true for perfect competition? profit is maximized where mr = mc. the industry demand curve
    15·1 answer
  • intext:"The adjusting entry at the end of an accounting period to record the unpaid salaries of employees for work provided is"
    6·1 answer
  • Bradley, an executive chef in a large hotel, recently attended a training conference sponsored by several top professionals in h
    6·1 answer
  • Cor-Eng Partnership was formed on January 2, 20X1. Under the partnership agreement, each partner has an equal initial capital ba
    6·1 answer
  • What is the purpise of a Appraisal Form?​
    5·1 answer
  • Which of the following is true regarding positive organizational scholarship? a. It involves monitoring negative practices in or
    10·1 answer
  • Which of the following proposes that job satisfaction has a positive effect on customer service, which flows on to shareholder f
    12·1 answer
  • The inclusion of leases on the balance sheet as an asset and liability has lowered firm’s debt-to-equity ratio.True / False.
    5·2 answers
  • Assume General Electric Company reports the following footnote in its 10-K report. December 31 (In millions) 2016 2015 Raw mater
    14·1 answer
  • On the balance sheet, if ending inventory is overstated, then total assets will be __________ and stockholders' equity will be _
    7·1 answer
Add answer
Login
Not registered? Fast signup
Signup
Login Signup
Ask question!