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zmey [24]
3 years ago
7

The FI Corporation’s dividends per share are expected to grow indefinitely by 5% per year. a. If this year’s year-end dividend i

s $8 and the required rate of return is 10% per year, what must the current stock price be according to the DDM? b. If the expected earnings per share are $12, what is the value of the ROE on the firm’s investment opportunities? c. How much is the market paying per share for growth opportunities?
Business
1 answer:
bezimeni [28]3 years ago
5 0

Answer and Explanation:

The computation is shown below:

a. The current stock price is

As we know that

Current stock price = (Dividend) ÷ (Required rate of return - growth rate)

= ($8) ÷ ( 10% - 5%)

= $160

b. Now the value of the ROE on the firm’s investment opportunities is

Given that

Dividend  = $8

And,  

The payout ratio = Dividend ÷ Earning per share

                            = $8 ÷ $12

                            = 0.666666666666667

And, retention  ratio (b) is

= 1- 0.666666666666667

= 0.333333333333333

In addition to it

indefinite growth rate (g) = 5%

So, the ROE is

= Growth rate ÷ retention ratio

= 0.15 ÷ 0.3333

= 15%

c. And, the market paying per share is

PVGO = Price - Earning per share ÷ required rate of return

where,

PVGO = Present Value of Growth Opportunity

So, the market paying per share is

= $160 - $12 ÷ 10%

= $160 - $120

= $40

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When Padgett Properties LLC was formed, Nova contributed land (value of $358,500 and basis of $89,625) and $179,250 cash, and Os
lawyer [7]

Answer:Amount of Nova and Oscar's gain=$492,937.50

Explanation:

a)According to  Land recorded for   § 704(b) book capital account purposes, Land is  recorded at fair market value. With this, the Padgett properties should record the land at $358,500

b)From the question, it is given that the  basis of land is  $89,625. Therefore, the Padgett Properties LLC's tax basis in the land is $89,625.

c)Amount of Nova and Oscar's gain.

Fair market value of Land         $358,500

Basis of land                                  $89,625  

total                                              $ 448,125

but Gain =  Selling price of land - Fair value of Land  x interest in partnership profits and capital  

= $537,750 - ($358,500+$89,625 )

=($537,750 - $448,125 )  x 50% =$44,812.50

Total gain                   $448,125 + $44,812.50 =$492,937.50

4 0
2 years ago
Bad Debt Expense info:Allowance for Doubtful Accounts has a credit balance of $1,000. Credit sales are $500,000. Cash sales are
kow [346]

Answer:

Bad Debt Expense $24,000 Dr

Allowance for Doubtful Accounts $24,000 Cr

Explanation:

Data:

BB = Beginning Balance = $1,000

CS = Credit Sales = $500,000

CH = Cash Sales = $500,000

SM = Percentage Sales Method = 5% = 0.05

U = Uncollectible = $25,000

AR = Accounts Receivable = $200,000

ADA = Allowance for Doubtful Accounts = ?

Calculations:

ADA = U - BB = $25,000 - $1,000 = $24,000

Net Realizable Cash Value = AR - ADA = $200,000 - $24,000 = $176,000

Balance in the Allowance Account after the adjusting entry = BB + ADA = $1,000 + $24,000 = $25,000

Journal entry:

Bad Debt Expense $24,000 Dr

Allowance for Doubtful Accounts $24,000 Cr

Hope this helps!

8 0
3 years ago
A firm currently has a debt-equity ratio of 1/2. The debt, which is virtually riskless, pays an interest rate of 6%. The expecte
Svetradugi [14.3K]

Answer:

Expected return on equity is 11.33%

Explanation:

Using Weighted Average Cost Capital without tax formula, overall rate of return is given by the formula:

WACC=(Ke*E/V)+(Kd*D/V)

Kd is the cost of debt at 6%

Ke is the cost of equity at 12%

D/E=1/2 which means debt is 1 and equity is 2

D/V=debt/debt+equity=1/1+2=1/3

E/V=equity/debt+equity=2/1+2=2/3

WACC=(12%*2/3)+(6%*1/3)

WACC=10%

If the firm reduces debt-equity ratio to 1/3,1 is for debt 3 is for equity

D/V=debt/debt+equity=1/1+3=1/4

E/V=equity/debt+equity=3/1+3=3/4

WACC=10%

10%=(Ke*3/4)+(6%*1/4)

10%=(Ke*3/4)+1.5%

10%-1.5%=Ke*3/4

8.5%=Ke*3/4

8.5%=3Ke/4

8.5%*4=3 Ke

34%=3 Ke

Ke=34%/3

Ke=11.33%

4 0
3 years ago
What is the term that defines how recently a customer purchased items?
KatRina [158]
The answer is recency. This part of the RFM model. It is a marketing investigation tool used to classify a firm's best customers by calculating definite factors.

The RFM model is founded on three quantitative factors which are:

Recency - How recently a customer has made an acquisition or purchase of productFrequency – How frequent or often a customer makes a purchaseMonetary Value - How much cash a customer spends on purchases

RFM analysis often sustains the marketing saying that "80% of business comes from 20% of the customers."
6 0
3 years ago
Sultan Services has 1.2 million shares outstanding. It expects earnings at the end of the year of $6.0 million. Sultan pays out
Kisachek [45]

Answer:

A) $60.00

Explanation:

to calculate the value of Sultan's stocks, we need to use the growing perpetuity formula:

stock price = dividend / (required return rate - growth rate)

  • dividend = ($6,000,000 x 60%) / 1.2 million shares = $3,600,000 / 1.2 million shares = $3 per share
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  • growth rate = 5%

stock price = $3 / (10% - 5%) = $3 / 5% = $60 per share

5 0
2 years ago
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