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rodikova [14]
3 years ago
5

6. The DAP Company has decided to make a major investment. The investment will require a substantial early cash out-flow, and in

flows will be relatively late. As a result, it is expected that the impact on the firm's earnings for the first 2 years will be a negative growth of 5% annually. Further, it is anticipated that the firm will then experience 2 years of zero growth after which it will begin a positive annual sustainable growth of 6%. If the firm's cost of capital is 10% and its current dividend (D0) is $2 per share, what should be the current price per share?
Business
1 answer:
Trava [24]3 years ago
4 0

Answer:

The DAP Company

Current price per share:

Current price = Current Dividend (D0) / (WACC - Growth Rate)

= $2/ (0.10 - 0.06) = $50

Explanation:

The technique used to value the share price is called the Dividend Discount Model (DDM).  The Myron Gordon model of this DDM is popularly used.

This model states that the current price of a share is the Current Dividend (D0) divided the difference between the cost of capital and the growth rate.

The result is the intrinsic value of the stock.  The model assumes that dividends are paid in perpetuity and that the growth rate is constant over many years.

These remain assumptions as the real life offers quite different scenarios.  There is no company that pays dividend every year in perpetuity.   A company's growth rate is never constant year on year.

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WITCHER [35]

Answer:

Assume the note indicates that Seneca is to pay Arctic the $39,700 due on the note on December 31, 2021. Prepare the journal entry for Arctic to record the sale on January 1, 2021.

Dr Notes receivable 39,700

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   Cr Discount on notes receivable 2,940.74

Discount on notes receivable is a contra asset account that decreases the net amount of notes receivable.

Assume the same facts as in requirement 1, and prepare the journal entry for Arctic to record collection of the payment on December 31, 2021.

Dr Cash 39,700

    Cr Notes receivable 36,759.26

    Cr Interest revenue 2,940.74

Assume instead that Seneca is to pay Arctic the $39,700 due on the note on December 31, 2022. Prepare the journal entry for Arctic to record the sale on January 1, 2021.

Dr Notes receivable 39,700

   Cr Sales revenue 34,036.35

   Cr Discount on notes receivable 5,663.65

Discount on notes receivable is a contra asset account that decreases the net amount of notes receivable.

Assume instead that Arctic does not view the time value of money component of this arrangement to be significant, and that the note indicates that Seneca is to pay Arctic the $39,700 due on the note on December 31, 2021. Prepare the journal entry for Arctic to record the sale on January 1, 2021.

Dr Notes receivable 33,900

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Explanation:

Non interest bearing notes must be recorded at present value, so we need to determine the present value of the payment:

Payment due December 21, 2021, PV = $39,700 / (1 + 8%) = $36,759.26

Payment due December 21, 2022, PV = $39,700 / (1 + 8%)² = $34,036.35

We use the discount on notes receivable account (contra asset account) to decrease the net value of notes receivable.

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Which of the following is an example of a functional team? a. A plastic surgeon, a dentist, a nurse, and a health insurance spec
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The after-tax equilibrium quantity of cigarettes smoked will equal the socially optimal quantity of cigarettes smoked. The correct option is C.

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