If a person has $1,000 in a savings account and earns $20 a year in interest on that account, the rate of return on the money is
1 answer:
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Answer:
a. $43.21
Explanation:
Find <u>dividend (D) per year;</u>
D1 = D0(1+g)
D0= current dividend = 1.05
g= growth rate = 25% or 0.25 as a decimal
therefore;
D1 = 1.05(1.25) =1.3125
D2 = 1.3125 (1.25) = 1.6406
D3 = 1.6406(1.25) =2.0508
D4 = 2.0508 (1.25) = 2.5635
D5 = 2.5635(1.25) = 3.2044
D6 = 3.2044(1.25) =4.0055
D7 = 4.0055 (1.25) = 5.0069
Terminal dividend: D8 = 5.0069(1.03) = 5.1571
Next , find the <u>present values</u> of each dividend (at t=0) at 11% discount rate;
1.3125 / (1.11) = 1.1824
1.6406 / (1.11^2) = 1.3315
2.0508 / (1.11^3) = 1.4995
2.5635 / (1.11^4) = 1.6887
3.2044 / (1.11^5) = 1.9017
4.0055 / (1.11^6) = 2.1415
5.0069 / (1.11^7) = 2.4116
Price of growing perpetual at (t= 0) =
Next, sum up all the Present values to get the current stock price;
=43.2064
Therefore, the current price = $43.21