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tatuchka [14]
3 years ago
6

A company is about to go public. it announces that it plans to pay a $1 per share dividend in its first year of existence and 2$

in its second year. from year 3 onwards dividends are expected to grow at a constant rate of 10% per year. the risk free rate is 5%, the company's beta is 2 and the expected market return is 20%. what should be the ipo stock price?
Business
1 answer:
andreyandreev [35.5K]3 years ago
8 0

Answer:

Issue price of IPO = $5.41442

Explanation:

As provided:

Using capital asset pricing model we have:

Expected return on security = Rf + Beta \times (Rm - Rf)

Where Rf = Risk free rate of return

Rm = Market return

Expected return = 5% + 2 \times (20% - 5%)

= 0.05 + 0.30

= 35%

Year 3 dividend = $2 + 10% = $2.20

Thus price using dividend growth model

= \frac{2.20}{0.35\ -\ 0.10} = 8.80

Its discounted value = $8.80 \times 0.4064 = $3.57632

Year 2 dividend = $2, its discounted value @ 35% = $2 \times 0.5487

= $1.0974

Discounted value of dividend of year 1 = $0.7407

Total price of stock = $0.7407 + $1.0974 + $3.57632 = $5.41442

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You have assigned the following values to these three firms: Price Upcoming Dividend Growth BetaEstee Lauder $50.00 $1.70 16.50%
satela [25.4K]

Answer and Explanation:

The formula to compute the required rate of return using the CAPM and constant growth model is as follows

Under CAPM

The Required rate of return = Risk-free rate of return + Beta × (Market rate of return - risk-free rate of return)

Constant growth model = Dividend ÷ Price + Growth rate

For Estee lauder,

Under CAPM = 4% + 0.74 × (10% - 4%)

= 4% + 0.74 × 6%

= 4% + 4.44%

= 8.44%

Under the Constant growth model

= $1.70 ÷ $50 + 16.50%

= 19.90%

For Kimco realty,

Under CAPM = 4% + 1.51 × (10% - 4%)

= 4% + 1.51 × 6%

= 4% + 9.06%

= 13.06%

Under the Constant growth model

= $1.68 ÷ $82 + 11%

= 13.05%

For Estee lauder,

Under CAPM = 4% + 1.02× (10% - 4%)

= 4% + 1.02 × 6%

= 4% + 6.12%

= 10.12%

Under the Constant growth model

= $0.60 ÷ $10 + 13%

= 19.00%

8 0
2 years ago
Please help me. Only answer if you know.
Nostrana [21]
A. Occupational Outlook Handbook.
3 0
3 years ago
How do you solve economic equations when they add percentages like 200% & add another # with it?
kobusy [5.1K]

Answer:

Sorry if this is unclear btw!

Explanation:

A percentage is a number multiplied by 100. So, 200 ÷ 100 = 2. So, if you are adding 200% to a number, you only add 2. When multipliying by 200%, you multiply by 2. Same for subtraction and division!

3 0
2 years ago
10. Suppose the price of a share of IBM stock is $100. An April call option on IBM stock has a premium of $5 and an exercise pri
ch4aika [34]

Answer:

The answer is C.

Explanation:

Call option is a financial contract that gives the holder(holder of call option) the right but not the obligation to buy an asset(bond, equity etc.). The holder of call option expects the underlying assets to increase in future.

The excercise price or strike price is $100

The premium(the price paid by the buyer to the seller to obtain this right) is $5

The total is $105($100 + $5)

So for profit to be recorded, this must be over $105 which is from $106.

4 0
3 years ago
In multiple regression, the constant :
Kaylis [27]

Answer:

a. Is the expected value of the dependent variable Y when all of the independent variables have the value zero

Explanation:

  • This regression is the extension of the simple linear regression and is used when we want to define the values of the variable based on the values of the two or more variables and constant terms in the regression analysis are the values at which the regression line crosses at the Y-axis.
3 0
3 years ago
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