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worty [1.4K]
4 years ago
13

Trend-Line Inc. has been growing at a rate of 6% per year and is expected to continue to do so indefinitely. The next dividend i

s expected to be $5 per share. a. If the market expects a 10% rate of return on Trend-Line, at what price must it be selling? (Do not round intermediate calculations.) b. If Trend-Line’s earnings per share will be $8 next year, what part of its value is due to assets in place? (Do not round intermediate calculations.) c. If Trend-Line’s earnings per share will be $8 next year, what part of its value is due to growth opportunities? (Do not round intermediate calculations.)
Business
1 answer:
vodka [1.7K]4 years ago
3 0

Answer:

a. $125

b. $80

c. $45

Explanation:

a. If the market expects a 10% rate of return on Trend-Line, at what price must it be selling? (Do not round intermediate calculations.)

Current selling price = Next dividend / (Rate of return - Growth rate) = $5 / (10% - 6%) = $125.

b. If Trend-Line’s earnings per share will be $8 next year, what part of its value is due to assets in place? (Do not round intermediate calculations.)

The value due to assets in place = Next year earning per share / Market rate of return = $8/10% = $80.

c. If Trend-Line’s earnings per share will be $8 next year, what part of its value is due to growth opportunities? (Do not round intermediate calculations.)

The value due to growth opportunities = Current selling price - The value due to assets in place = $125 - $80 = $45.

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