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sweet-ann [11.9K]

3 years ago

13

After learning about inflation and some of its history, what would be the inflation target that is most advisable for an economy

?

1 answer:

Talja [164]3 years ago

8 0

Answer:

1-2%

Explanation:

In simple words, every nation in the world have some kind of central authority that works to control and keep the inflation as low as possible. However, too low inflation can also lead to recession which brings problems way worse than inflation.

Thus, keeping in mind about all the information we have studied, it is advisable to keep inflation at 1% or 2% band, so that economy can grow moderately along with no price pressure on consumers.

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Instructions: Please make sure that you show all your work when solving the problems. Feel free to make any assumptions whenever

My name is Ann [436]

Answer:

Explanation:

From the given information:

The current price = $\dfrac{Dividend(D_o) \times (1+ Growth \ rate) }{\text{Cost of capital -Growth rate}}$

$15 = \dfrac{0.50 \times (1+ Growth rate)}{8\%-Growth rate}$

$15 \times (8 -Growth \ rate) = 0.50 +(0.50 \times growth \ rate)$

$1.20 - (15 \times Growth \ rate) = 0.50 + (0.50 \times growth \ rate)$

$0.70 = (15 \times growth \ rate) \\ \\ Growth \ rate = \dfrac{0.70}{15.50} \\ \\ Growth \ rate = 0.04516 \\ \\ Growth \ rate \simeq 4.52\% \\ \\$

2. The value of the stock

Calculate the earnings at the end of 5 years:

$Earnings (E_o) \times Dividend \ payout \ ratio = Dividend (D_o) \\ \\ Earnings (E_o) \times 35\% = \$0.50 \\ \\ Earnings (E_o) =\dfrac{\$0.50}{35\%} \\ \\ = \$1.42857$

$Earnings (E_5) year \ 5 = Earnings (E_o) \times (1 + Growth \ rate)^{no \ of \ years} \\ \\ Earnings (E_5) year \ 5 = \$1.42857 \times (1 + 12\%)^5 \\ \\ Earnings (E_5) year \ 5 = \$2.51763$

Terminal value year 5 = $\dfrac{Earnings (E_5) \times (1+ Growth \ rate)}{Interest \ rate - Growth \ rate}$

$=\dfrac{\$2.51763\times (1+0.04516)}{8\%-0.04516}$

=$75.526

Discount all potential future cash flows as follows to determine the stock's value:

$\text{Value of stock today} =\bigg( \sum \limits ^{\text{no of years}}_{year =1} \dfrac{Dividend (D_o) \times 1 +Growth rate ) ^{\text{no of years}}}{(1+ interest rate )^{no\ of\ years} }$

$+ \dfrac{Terminal\ Value }{(1+interest \ rate )^{no \ of \ years}} \Bigg)$

$\implies \bigg(\dfrac{\$0.50\times (1 + 12\%)^1) }{(1+ 8\%)^{1} }+ \dfrac{\$0.50\times (1+12\%)^2 }{(1+8\% )^{2}}+ \dfrac{\$0.50\times (1+12\%)^3 }{(1+8\% )^{3}} + \dfrac{\$0.50\times (1+12\%)^4 }{(1+8\% )^{4}} + \dfrac{\$0.50\times (1+12\%)^5 }{(1+8\% )^{5}} + \dfrac{\$75.526}{(1+8\% )^{5}} \bigg )$

$\implies \bigg(\dfrac{\$0.5600}{1.0800}+\dfrac{\$0.62720}{1.16640}+\dfrac{\$0.70246}{1.2597}+\dfrac{\$0.78676}{1.3605}+\dfrac{\$0.88117}{1.4693}+ \dfrac{\$75.526}{1.4693} \bigg)$

=$ 54.1945

As a result, the analysts value the stock at $54.20, which is below their own estimates.

3. The value of the stock

Calculate the earnings at the end of 5 years:

$Earnings (E_o) \times Dividend payout ratio = Dividend (D_o) \\ \\ Earnings (E_o) \times 35\% = \$0.50 \\ \\ Earnings (E_o) =\dfrac{\$0.50}{35\%}\\ \\ = \$1.42857$

$Earnings (E_5) year \ 5 = Earnings (E_o) \times (1 + Growth \ rate)^{no \ of \ years} \\ \\ Earnings (E_5) year \ 5 = \$1.42857 \times (1 + 12\%)^5 \\ \\ Earnings (E_5) year \ 5 = \$2.51763 \\ \\$

Terminal value year 5 = $\dfrac{Earnings (E_5) \times (1+ Growth \ rate)\times dividend \ payout \ ratio}{Interest \ rate - Growth \ rate}$

$=\dfrac{\$2.51763\times (1+ 7 \%) \times 20\%}{8\%-7\%}$

=$53.8773

Discount all potential cash flows as follows to determine the stock's value:

$\text{Value of stock today} =\bigg( \sum \limits ^{\text{no of years}}_{year =1} \dfrac{Dividend (D_o) \times 1 + Growth rate ) ^{\text{no of years}}}{(1+ interest rate )^{no \ of\ years} }+ \dfrac{Terminal \ Value }{(1+interest \ rate )^{no \ of \ years }} \bigg)$

$\implies \bigg( \dfrac{\$0.50\times (1 + 12\%)^1) }{(1+ 8\%)^{1} }+ \dfrac{\$0.50\times (1+12\%)^2 }{(1+8\% )^{2}}+ \dfrac{\$0.50\times (1+12\%)^3 }{(1+8\% )^{3}} + \dfrac{\$0.50\times (1+12\%)^4 }{(1+8\% )^{4}} + \dfrac{\$0.50\times (1+12\%)^5 }{(1+8\% )^{5}} + \dfrac{\$53.8773}{(1+8\% )^{5}} \bigg)$

$\implies \bigg (\dfrac{\$0.5600}{1.0800}+\dfrac{\$0.62720}{1.16640}+\dfrac{\$0.70246}{1.2597}+\dfrac{\$0.78676}{1.3605}+\dfrac{\$0.88117}{1.4693}+ \dfrac{\$53.8773}{1.4693} \bigg)$

=$39.460

As a result, the price is $39.460, and the other strategy would raise the value of the shareholders. Not this one, since paying a 100% dividend would result in a price of $54.20, which is higher than the current price.

Notice that the third question depicts the situation after 5 years, but the final decision will be the same since we are discounting in current terms. If compounding is used, the future value over 5 years is just the same as the first choice, which is the better option.

The presumption in the second portion is that after 5 years, the steady growth rate would be the same as measured in the first part (1).

8 0

3 years ago

Here is the accounting equation for Sam's auto parts $18,000= $12,000 +$6,000 The owner withdrew $1,500 for personal use. Write

Eva8 [605]

Answer:

$18000=$12000+$4500

5 0

3 years ago

Wolverine Corporation plans to pay $3 dividend per share on each of its 300,000 shares next year. Wolverine anticipates earnings

lesantik [10]

Answer:

new equity $ 1,425,000

new debt $ 950,000

Explanation:

retained earnings

300,000 x (6.25 - 3) = 975.000

If debt is 0.4 of assets then by deifinition:

assets = liab+ equity

1 = 4 + equity

equity = 0.6 (60%)

<u>Retained Earnings breakpoint</u>

975,000 / 0.6 = 1,625,000‬

The company can riase capital expenditured for 1,625,000 and mantaining his capital structure.

As the company need 4,000,000 it will need to raise more capital as it surpass the retained earnings breakpoint.

4,000,000 - 1,625,000 = 2,375,000

2,375,000 x 0.6 = 1,425,000 new equity

2,375,000 x 0.4 = 950,000 new debt

4 0

3 years ago

Pop Consulting leased machinery to Red Inc. on July 1, 2018. The lease was recorded as a sales type lease. The present value of

labwork [276]

Answer:

The increase in earnings is $136511.56

Explanation:

Since the lease is a sale type of lease,it means that as soon as the machinery is delivered to the lessee,profit should be recognized on the lease transaction,which is computed below:

Profit on lease=present value of lease payments-costs

=$274149-$156000

=$118149

However,every six months interest is charged on the lease,which clearly indicates another source of earnings,the interest in the first six months is given below:

Interest=($274149-$44617)*8%

=$18362.56

Please note that interest is charged after lease payment as lease payment is made in advance not in arrears.

Conclusively, the increase in earnings is $118149+$18362.56

That is $136511.56

5 0

3 years ago

seigel co. maintains a defined-benefit pension plan for its employees. at each balance sheet date, seigel should report a pensio

Lemur [1.5K]

Answer: funded status relative to the projected benefit obligation

Explanation:

A defined benefit pension plan is a pension plan type in which the employer promises to pay the worker a lump sum or a pension payment which is based on the earnings history, age and the tenure of service of the worker.

Since Seigel co. maintains a defined-benefit pension plan for its employees. at each balance sheet date, seigel should report a pension asset/liability that will be equal to the funded status relative to the projected benefit obligation.

4 0

3 years ago