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Ratling [72]
3 years ago
6

PE and Terminal Stock Price [LO2] In practice, a common way to value a share of stock when a company pays dividends is to value

the dividends over the next five years or so, then find the "terminal" stock price using a benchmark PE ratio. Suppose a company just paid a dividend of $1.15. The dividends are expected to grow at 20 percent over the next five years. In five years, the estimated payout ratio is 40 percent and the benchmark PE ratio is 21. What is the target stock price in five years? What is the stock price today assuming a required return of 12 percent on this stock?
Business
1 answer:
solong [7]3 years ago
6 0

Answer:

$150.15

$92.31

Explanation:

Target stock price in year 5 = Earnings per share in year 5 x benchmark PE ratio

Earnings per share in year 5 = dividends per share in year 5/ pay-out ratio

Dividend in year 1 =  $1.15 x 1.20 = $1.38

Dividend in year 2 = $ 1.15 x 1.20^2 = $1.66

Dividend in year 3 =  $1.15 x 1.20^3 = $1.99

Dividend in year 4 = $1.15 x 1.20^4 = $2.38

Dividend in year 5 = $1.15 x 1.20^5 = $2.86

$2.86 / 0.4 = $7.15

$7.15 x 21 = $150.15

b. the stock price today can be found by finding the present value of the dividends

Present value can be found using a financial calculator

Earnings per share in year 5 = dividends per share in year 5/ pay-out ratio

Dividend in year 1 =  $1.15 x 1.20 = $1.38

Dividend in year 2 = $ 1.15 x 1.20^2 = $1.66

Dividend in year 3 =  $1.15 x 1.20^3 = $1.99

Dividend in year 4 = $1.15 x 1.20^4 = $2.38

Dividend in year 5 = $1.15 x 1.20^5 = $2.86

Stock price in year 5 = $150.15

i = 12%

Stock price (present value) = $92.31

To find the PV using a financial calculator:

1. Input the cash flow values by pressing the CF button. After inputting the value, press enter and the arrow facing a downward direction.

2. after inputting all the cash flows, press the NPV button, input the value for I, press enter and the arrow facing a downward direction.

3. Press compute

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sergejj [24]

Answer:

$15,000

Explanation:

Total Assets-Remaining liabilities=Solvency

$232,000-$217,000=$15,000

If the waiver of loan makes the taxpayer solvent,then the extent by which he is solvent will be included in his/her gross income.

6 0
3 years ago
Logan, a 50 percent shareholder in Military Gear Inc. (MG), is comparing the tax consequences of losses from C corporations with
Musya8 [376]

Answer:

$9,840

Explanation:

In this question, we have to take the difference between the payment for S corporation and the C corporation

If Military Gear Inc is a C corporation, then the payment would be

= Ordinary income × marginal tax rate

= $84,000 × 24%

= $20,160

And, if Military Gear Inc is a S corporation, then the payment would be

= (Ordinary income - net effect) ×  marginal tax rate

= ($84,000 - $41,000) × 24%

= $43,000 × 24%

= $10,320

The net effect would be

= $159,000 - $118,000

= $41,000

The net payment would be

= $20,160 - $10,320

= $9,840

4 0
3 years ago
Owens Corning has total assets of $800,000, long-term debt of $240,000, stockholders' equity of $350,000, and current liabilitie
Artyom0805 [142]

Answer:

$50,800

Explanation:

Increase in assets = Current Assets * Percentage change in sales = $800,000 * 20% = $160,000

Increase in current liabilities = Current liabilities * Percentage change in sales = $210,000 * 20% = $42,000

Increase in retaned earning = Increased sales*Profit Margin*Retention ratio = $1,000,000*120%*8%*(1-0.30) = $67,200

External financing need = Increase in Assets - Increase in liabilities - Increase in retained earning

External financing need = $160,000 - $42,000 - $67,200

External financing need = $50,800

5 0
3 years ago
Clampett, Inc., has been an S corporation since its inception. On July 15, 2020, Clampett, Inc., distributed $44,000 to J.D. His
Serjik [45]

Answer:

-$8,600

Explanation:

Data provided in the question:

Distributions = $44,000

Basis = $42,000

Amount of ordinary income allocated = $10,600

Now,

Capital gain from distribution in excess of basis

= Distribution - Basis -  Amount of ordinary income allocated

= $44,000 - $42,000 - $10,600

= -$8,600

here, negative sign depicts there is a capital loss

8 0
3 years ago
An insurance annuity offers to pay you $1,000 per quarter for 20 years. If you want to earn a rate of return of 6.5 percent, com
bekas [8.4K]

Answer:

the amount that willing to pay is $44,591.11

Explanation:

The computation of the amount that willing to pay is as follows:

The Present Value of an Ordinary Annuity is

= Amount × [{1 - (1 ÷ (1 + rate of interest)^n} ÷ rate of interest]

= $1,000 × [{1 - (1 / (1 + 0.065 ÷ 4)^100} ÷ 0.065 ÷ 4]

= $44,591.11

Hence, the amount that willing to pay is $44,591.11

We simply applied the above formula so that the correct value could come

And, the same is to be considered

8 0
3 years ago
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