Business, 24.12.2019 04:31 rodrickahammonds

Assume a company has an annual dividend of $2.00 per share. it is expected to grow that dividend at a rate of 10% p. a. over the next two years and then at a rate of 7% p. a. thereafter. assuming the market's required rate of return for this company's stock is 15% p. a.: its implied valuation using a dividend discount model is closest to:

a. $27.50
b. $28.20
c. $28.90
d. $29.70

Answers: 1

Show answers

Answers

Answer from: Disd112984

PHASE 1

Growth rate (g) = 10% = 0.10

No of years (n) = 2 years

Cost of equity (Ke) = 15% = 0.15

Current dividend paid (Do) = $2

Dividend in 1 year’s time (D1) = Do(1+g)n

= $2(1 + 0.10)1

= $2.20

Dividend in 2 year’s time (D2) = Do(1+g)n

= $2(1 + 0.10)2

V1 = D1 + D2

(1 + K) (1 + K)2

V1 = $2.20 + $2.42

(1 + 0.15) (1 + 0.15)2

V1 = 2.20 + $2.42

1.15 1.15)2

V1 = $1.9130 + $1.8297

V1 = $3.7427

PHASE 2

g = 7% = 0.07

V2 = DN( 1 + g)

(Ke –g)(1+ K)n

V2 = $2.42(1 + 0.07)

(0.15 – 0.07)(1+ 0.15)2

V2 = $2.5894

(0.08)(1.15)2

V2 = $2.5894

(0.08)(1.3225)

V2 = $24.4745

Current market price = V1 + V2

= $3.74 + $24.47

= $28.21

The correct answer is B

Explanations:

In this case, there is need to calculate the current market price of equity in the first growth regime of 10%. The current market price is a function of dividend in 1 year’s time and dividend in year’s time divided by (1 + Ke)n.

In the second phase of growth, the growth rate is 7%. We need, to determine the current market price , which is a function of dividend in 2 year’s time, subject to the new growth rate divided by the product of K-g and (1+ K)n.

The current market price is the aggregate of market prices for the two growth regimes.

Answer from: Quest

This question seems like it should be quite hard although it reall just wants you to subtract.92-8.7=83.3

Answer from: Quest

Answer the above statement is ( true );

Another question on Business

Business, 22.06.2019 13:40

Determine if the following statements are true or false. an increase in government spending can crowd out private investment. an improvement in the budget balance increases the demand for financial capital. an increase in private consumption may crowd out private investment. lower interest rates can lead to private investment being crowded out. a trade balance in sur+ increases the supply of financial capital. if private savings is equal to private investment, then there is neither a budget sur+ nor a budget deficit.

Answers: 1

Answer

Business, 22.06.2019 19:10

After the price floor is instituted, the chairman of productions office buys up any barrels of gosum berries that the producers are not able to sell. with the price floor, the producers sell 300 barrels per month to consumers, but the producers, at this high price floor, produce 700 barrels per month. how much producer surplus is created with the price floor? show your calculations.

Answers: 2

Answer

Business, 22.06.2019 20:40

Which of the following would indicate an improvement in a company's financial position, holding other things constant? a. the inventory and total assets turnover ratios both decline.b. the debt ratio increases.c. the profit margin declines.d. the times-interest-earned ratio declines.e. the current and quick ratios both increase.

Answers: 3

Answer

Business, 22.06.2019 22:00

Most economists report the elasticity of demand asa. the absolute value of the actual number.b. a negative number, since price and quantity demanded move in opposite directions.c. a percentage, since both the numerator and denominator are percentages.d. a dollar amount, since we are measuring the change in price.

Answers: 2

Answer

You know the right answer?

Assume a company has an annual dividend of $2.00 per share. it is expected to grow that dividend at...

Questions