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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?

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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Lemur [1.5K]

Ben paid the value of the item + sales tax
Sales tax = 6.25% of worth of item.
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3 years ago

Deep Water Mining added $411 to retained earnings last year on sales of $24,646. The administrative expenses were $4,370, deprec

ANTONII [103]

Answer:

It is $18,290.24

Explanation:

Profit after Tax (65%) = addition to retained earnings+dividend paid

= $411 + $285

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3 years ago

A firm has estimated the following demand function for its product:

Rom4ik [11]

Answer:

(i) Q=300

(ii) Elasticity of Demand=-3.33 (elastic)

(iii) Income Elasticity= 2.5 (normal good)

(iv) Advertising Elasticity: 1.5

Explanation:

The Demand function is given by

$Q=100-5P+5I+15A$

(1) To solve (i) we need to replace P = 200, I = 150, and A = 30 in the demand equation:

$Q=100-5(200)+5(150)+15(30)=300$

(2) To find the price elasticity (how much quantity demanded changes with price) we use the point price elasticity formula

$\eta_{Price}=\frac{\Delta Q}{\Delta P}\frac{P}{Q}$

From the above equation we get: $\frac{\Delta Q}{\Delta P}=-5$

Replacing in the elasticity formula

$\eta_{Price}=-5\frac{200}{300}=|-3.33|>1$

in absolute terms the elasticity is bigger than one so it is an elastic demand.

(3) For income elasticity (how much quantity demanded changes with income), we proceed similarly as above. But the derivative is respect to income

$\eta_{Income}=\frac{\Delta Q}{\Delta I}\frac{I}{Q}=5\frac{150}{300}=2.5>1$ [/tex]

Which is bigger than one, denoting this is a normal good because it's bigger than one.

(4) Advertising elasticity (how much quantity demanded changes with expenditures in advertising), we proceed as before

$\eta_{advertising}=\frac{\Delta Q}{\Delta A}\frac{A}{Q}=15\frac{30}{300}=1.5$

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3 years ago

By lowering production costs, _____ help domestic producers compete against foreign imports

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<h3 /><h3>What are subsidies?</h3>

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This allows the local firms to then sell their goods at a lower price so that they can compete with cheaper imports.

Options for this question include:

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2 years ago

The monthly demand q for a monopolist firm's product in a certain market (measured in 1000s of units) is related to the price pe

Gnesinka [82]

Answer: (b) -3.08

Explanation:

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From the expression above, the marginal demand,

∂ q/∂ p is the differential of the equation of relationship between the demand, price and disposable income.

This involves considering the demand,q as the dependent variable and the price per unit product,p as the independent variable and the disposable income,yd is considered constant.

Therefore ,

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By substitution of

yd =$3000÷1000= $3

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∂ q/∂ p= -40÷13= 3.08

Please see the attachment for knowledge on how ∂ q/∂ p was obtained.

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