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arlik [135]
3 years ago
8

Paunch Burger has a beta of 1.2 and just paid a dividend of $2.30 that is expected to grow at 3.2%. If the risk-free rate is 3%

and the market risk premium is 6%, what should be the price of the stock
Business
1 answer:
AlekseyPX3 years ago
6 0

Answer:

P0 = $33.9085 rounded off to $33.91

Explanation:

Using the constant growth model of dividend discount model, we can calculate the price of the stock today. The DDM values a stock based on the present value of the expected future dividends from the stock. The formula for price today under this model is,

P0 = D0 * (1+g) / (r - g)

Where,  

D0 is the dividend paid  recently

D0 * (1+g) is dividend expected for the next period /year

g is the growth rate

r is the required rate of return or cost of equity

First we need to calculate the required rate of return or r using the CAPM.

Using the CAPM, we can calculate the required/expected rate of return on a stock. This is the minimum return required by the investors to invest in a stock based on its systematic risk, the market's risk premium and the risk free rate.  

The formula for required rate of return under CAPM is,

r = rRF + Beta * rpM

Where,  

rRF is the risk free rate

rpM is the market risk premium

r = 0.03 + 1.2 * 0.06

r = 0.102 or 10.2%

Now using the formula for P0 under the constant dividend growth model,

P0 = 2.3 * (1+0.032)  /  (0.102 - 0.032)

P0 = $33.9085 rounded off to $33.91

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The effect on the financial reporting of the company is that the liabilities on the balance sheet would be understated. This is because at the end of the year, a possible event was calculated. The management felt from the calculation of that event that it is possible that the event could become an actual liability and that the amount could be estimated explainably. So it would become understated if these calculations of probable events cannot be written down in the balance sheet or in the notes of the final statements. It is like a forecasting of possible events that may happen in the future to prevent losses in the company.  
8 0
3 years ago
Zen Co. sells a copier machine for $2,000. The copier cost Zen $6,000 and at the time of sale, accumulated depreciation was $2,5
Alenkinab [10]

Answer:

The correct option is: Debit to Loss on Disposal of Machinery for $1,500.

Explanation:

As at the time of sale, the net book value (cost - accumulated depreciation) of the copier machine was $3,500 ($6,000 - $2,500). Then, the proceed from sale is $2,000. The full accounting entries to record the transaction will be:

Debit Accumulated depreciation                          $2,500

Debit Cash (sales proceed)                                   $2,000

Debit Loss on disposal of machinery                    $1,500

Credit Fixed asset (cost - copier machine)           $6,000

<em>(To record disposal of copier machine)</em>

8 0
3 years ago
Using the following to answer Q6-Q8: The results of inspection of DNA samples taken over the past 10 days are given below.
Yuliya22 [10]

Answer:

The average defective rate of the samples is:

6.3 samples per day

Explanation:

To calculate the average or mean defective rate, we will compute the total number of defective samples, and divide the result by the total number of days. It is important to note that day 7 is ignored during this calculation because there was no defective DNA sample on that day, hence it does not contribute to the average defective samples.

Total Defective DNA sample = 7 + 6 + 6 + 9 + 5 + 6 + 8 + 9 + 1 = 57

Total number of days = 9 ( Days 1 to 6, and 8 to 10).

Therefore, average defective rate = Total Defective DNA sample ÷ Total number of days

= 57 ÷ 9 = 6.3 DNA samples

8 0
3 years ago
Bass Accounting Services expects its accountants to work a total of 23 comma 000 direct labor hours per year. The​ company's est
MissTica

Answer:

Estimated indirect costs allocation rate= $14 per direct labor hour

Explanation:

Giving the following information:

Estimated direct labor hours= 23,000

Estimated indirect costs= $322,000.

To calculate the allocation rate, we need to use the following formula:

Estimated indirect costs allocation rate= total estimated indirect  costs for the period/ total amount of allocation base

Estimated indirect costs allocation rate= 322,000/23,000

Estimated indirect costs allocation rate= $14 per direct labor hour

4 0
3 years ago
On January 1, 2017, Ellison Co. issued eight-year bonds with a face value of $6,000,000 and a stated interest rate of 6%, payabl
sergiy2304 [10]

Answer:

Bond Price = $5,300,862.264 rounded off to $5,300,862.26

Explanation:

To calculate the price of the bond today, we will use the formula for the price of the bond. Assuming the bond is an annual bond, the semi coupon payment, number of periods and semi annual YTM will be,

Coupon Payment (C) = 6,000,000 * 0.06 * 6/12 = 180 ,000

Total periods (n) = 8 * 2 = 16

r or YTM = 0.08 * 6/12 = 0.04 or 4%

The formula to calculate the price of the bonds today is attached.

Bond Price = 180000 * [( 1 - (1+0.04)^-16) / 0.04]  + 6000000 / (1+0.04)^16

Bond Price = $5,300,862.264 rounded off to $5,300,862.26

8 0
2 years ago
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