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AlekseyPX
3 years ago
14

A share of stock is now selling for $115. It will pay a dividend of $9 per share at the end of the year. Its beta is 1. What do

investors expect the stock to sell for at the end of the year? Assume the risk-free rate is 5% and the expected rate of return on the market is 14%. (Round your answer to 2 decimal places.)
Expected selling price $
Business
1 answer:
natali 33 [55]3 years ago
4 0

Answer:

The expected price of the stock is $122.03

Explanation:

To calculate the expected price of the stock at the end of the year or at Year 1, we first need to determine the required rate of return on the stock. We will use the CAPM equation to calculate the required rate of return.

The required rate of return is calculated as,

r = rRF + Beta * (rM - rRF)

Where,

  • rRF is the risk free rate
  • rM is the return on market

r = 0.05 + 1 * (0.14 - 0.05)

r = 0.14

We already have the price of the stock today, the D1 and the required rate of return. Using the constant dividend growth model of DDM, we calculate the growth rate in dividends to be,

P0 = D1 / (r - g)

115 = 9 / (0.14 - g)

115 * (0.14 - g)  =  9

16.1 - 115g  =  9

16.1 - 9 = 115g

7.1 / 115 = g

g = 0.0617 or 6.17%

Using the same formula and replacing D1 with D2, we can calculate the price of the stock at the end of the year or at start of Year 1.

P1 = 9 * (1+0.0617)  /  (0.14 - 0.0617)

P1 = $122.03

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5 0
3 years ago
Greer Company developed the following data for the current year:
bixtya [17]

Answer:

option (C) is correct.

Explanation:

Given that,

Beginning work in process inventory: $102,000

Direct materials used: 156,000

Actual overhead: 132,000

Overhead applied: 138,000

Cost of goods manufactured: 675,000

Total manufacturing costs: 642,000

Company's direct labor cost for the year:

= Total manufacturing costs - Overhead cost - Direct materials cost

= Total manufacturing costs - Overhead applied - Direct materials used

= $642,000 - $138,000 - $156,000

= $348,000

5 0
3 years ago
The rate of return on the common stock of Flowers by Flo is expected to be 14 percent in a boom economy, 8 percent in a normal e
FinnZ [79.3K]

Answer: The standard deviation of the stock is 3.23 percentage

Explanation:

First we shall calculate the epected weighted average return of the stock.

We shall multiply the probability of the scenario with its expected return and then take the sum of the expected returns of different scenarios,

E(x) = (0.2 x 14%) + (0.7 x 8%) + (0.1 x 2%)

E(x) = 8.6%

We shall use the follwing formula to calculate the Variance of the stock,

σ²(x) = ∑ P(x_{i}) × [x_{i} - E(r)]²

σ²(x)  = (0.2) (0.14 - 0.086)² + (0.7) (0.08 - 0.086)² + (0.1) (0.02 - 0.086)²

σ²(x) = 0.001044

To find the standar deviation,

σ(x) = \sqrt{0.001044}

σ(x) = 0.0323109

in percentage it would be 3.23%

7 0
3 years ago
Suppose a company earns a profit this year and has a dividend payout ratio of one half. What does this mean?
algol [13]

Answer:

C

Explanation:

The dividend payout ratio is the ratio of dividends paid to shareholders in proportion to net income

Payout ratio = dividends / net income

If dividend payout ratio of one half, it means that only half of net income is paid as dividends

7 0
3 years ago
A firm has market power if it can a. maximize profits. b. minimize costs. c. influence the market price of the good it sells. d.
VikaD [51]

Answer:

Option C: Influence the market price of the good as it sells

Explanation:

Market Power is simply when a firm is able to raise price above the equilibrium level by not and without losing all of its customers. It depends on largely on the closeness of substiutes.

A firm has market power if it can Influence the market price of the good as it sells to its customer and can regulate it when necessary.

5 0
3 years ago
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