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marin [14]
3 years ago
8

Bert's Car Sales is a new firm that is still in a period of rapid growth. The company plans on retaining all of its earnings for

the next four years. Five years from now, the company projects paying an annual dividend of $.20 a share and then increasing that amount by 3.5 percent annually thereafter. To value this stock as of today, you would most likely determine the value of the stock ________ years from today before determining today's value.a. 3
b. 4
c. 5
d. 6
e. 7
Business
1 answer:
DaniilM [7]3 years ago
3 0

Answer:

The correct choice is C)

The most logical thing to do would be to calculate the value of the stock in 5 years time.

Explanation:

This speaks to ones understanding of dividend growth stock valuation models. These tools are used to establish a fair value for a stock by discounting the present value of its future dividends. A commonly used model is the constant growth dividend discount model.

The formula for the DDM, which assumes constant growth in dividends, is provided below.

P0 = D1/(r-g)

Where,

P0 = intrinsic value of stock

D1 = dividend payment one year from today

r = discount rate

g = growth rate

Identifying the correct answer entails establishing a timeline of the expected cash flows. We are given the following information:

t0 = $0

t1 = $0

t2 = $0

t3 = $0

t4 = $0

t5 = $0.20

t6 = $0.20 * 1.035

Given a rate of return, we could use the constant growth dividend discount model to establish the fair value of the firm at t5 (five years from today). Incidentally, to determine today's value, we'd discount it back another five years.

Based on the information above,  we are able to prove that the answer is '5'.

Cheers!

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Fixed costs including depreciation have increased at Leverage Inc., from $4 million to $5.3 million in an effort to reduce varia
Anna35 [415]

Answer:

VC% = 73.5%

The New variable cost percentage of sales = 73.5%

Explanation:

Given;

New Fixed cost = $5.3 million

Total cost = $20 million

Total variable cost = $20 - $5.3 = $14.7 million

Variable cost percent=(total variable cost/total cost)×100%

VC% = (14.7/20) × 100%

VC% = 73.5%

5 0
3 years ago
Read 2 more answers
How do insurance companys make money?
user100 [1]
Most insurance companies generate revenue in two ways: Charging premiums in exchange for insurance coverage, then reinvesting those premiums into other interest-generating assets. Like all private businesses, insurance companies try to market effectively and minimize administrative costs
8 0
3 years ago
Western Electric has 35,000 ordinary shares outstanding at a price per share of $47 and a rate of return of 13.5%. The firm has
Luba_88 [7]

Answer:

a) Total market value of the firm = $2,394,000

b) The capital structure of the firm:

Weight of ordinary shares = 69%

Weight of preference shares = 12%

Weight of bond = 19%

c) The firm's weighted average cost of capital (WACC) = 11.28%

Explanation:

a) Calculate the total market value of the firm.

Total market value of the firm is the addition market values of ordinary shares, preference shares and bond. This can be calculated as follows:

Market value of ordinary shares = $47 * 35,000 = $1,645,000

Market value of preference shares = $58 * 5,000 = $290,000

Market value of bond = $450,000 * 102% = $459,000

Therefore, we have:

Total market value of the firm = $1,645,000 + $290,000 + $459,000 = $2,394,000

b) Calculate the capital structure of the firm

Capital structure of the firm is the weight of the market value of each of capital or finance sources in the total market value. This can be  calculated as follows:

Wo = Weight of ordinary shares = $1,645,000 / $2,394,000 = 0.69, or 69%

Wp = Weight of preference shares = $290,000 / $2,394,000 = 0.12, or 12%

Wb = Weight of bond = $459,000 / $2,394,000 = 0.19, or 19%

c) Calculate the firm's weighted average cost of capital if the tax rate is 30%, assuming a classical tax system.

The weighted average cost of capital (WACC) which is also referred to as firm's cost of capital refers to the rate the firm is expected  to pay on average to all holders of its security used in financing its assets. The WACC can be estimated as follows:

WACC = (Ro * Wo) + (Rp * Wp) + (Yb * Wb * (1 - T)) .................... (1)

Whrere,

Ro = Rate of return of ordinary shares = 13.5%

Rp = Rate of return on preference shares = 7%

Yb = Pre-tax yield-to-maturity on the bond = 8.49%

T = Tax rate = 30%

Substituting the values above and the relevant values from part (b) above into equation (1), we have:

WAAC = (13.5% * 69%) + (7% * 12%) + (8.49% * 19% * (1 - 30%)) = 11.28%

6 0
3 years ago
How do you start a business ?
mamaluj [8]
~ Step 1: Write a Business Plan.
Step 2: Get Business Assistance and Training.
Step 3: Choose a Business Location.
Step 4: Finance Your Business.
Step 5: Determine the Legal Structure of Your Business.
Step 6: Register a Business Name
Step 7: Register for State and Local taxes.
Step 8: Obtain business permits and licenses.
Step 9: Understand employer responbilities
Step 10: Find local assistance.
6 0
3 years ago
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There are zero coupon bonds outstanding that have a YTM of 6.09 percent and mature in 17 years. The bonds have a par value of $1
dlinn [17]

Answer:

$3,606.49

Explanation:

the price of a zero coupon bond = maturity value / (1 + i)ⁿ

  • maturity value = $10,000
  • i = 6.09% / 2 = 3.045% semiannual interest rate
  • n = 17 years x 2 semiannual compounding = 34 periods

the price of a zero coupon bond = $10,000 / (1 + 3.045%)³⁴ = $10,000 / 1.03045³⁴ = $10,000 / 2.772779928 = $3,606.49

the formula we used to determine the market price of a zero coupon bond is basically the present value

6 0
3 years ago
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