1

You are evaluating a stock for purchase. you estimate that the firm will pay the following...

Question

You are evaluating a stock for purchase. you estimate that the firm will pay the following...

you are evaluating a stock for purchase. you estimate that the firm will pay the following dividends in the coming years:

Year 1: $2

Year 2: $2.50

Year 3: $3

After the third year, the dividend is expected to grow at a long-term rate of 8%. Your required rate of return is 10%.

A. What is the intrinsic value of this stock?

B. If you purchase the stock at $120 and your estimates (of future dividends and prices) are correct, what is the EXPECTED RATE OF RETURN on your investment?

**PLEASE SHOW ALL WORK

Answers

(a)-Intrinsic value of this stock

Step-1, Dividend for the next 3 years

Dividend in Year 1 (D1) = $2.00 per share

Dividend in Year 2 (D2) = $2.50 per share

Dividend in Year 3 (D3) = $3.00 per share

Step-2, The Price of the stock in year 3 (P3)

Dividend Growth Rate after 3 years (g) = 8.00% per year

Required Rate of Return (Ke) = 10%

Therefore, the Share Price in year 3 (P3) = D3(1 + g) / (Ke – g)

= $3.00(1 + 0.08) / (0.10 – 0.08)

= $3.24 / 0.02

= $162.00 per share

Step-3, Intrinsic value of this stock

As per Dividend Discount Model, the Intrinsic value of this stock is the Present Value of the future dividend payments and the present value the share price in year 3

Year

Cash flow ($)

Present Value factor at 10%

Present Value of cash flows ($)

1

2.00

0.90909

1.82

2

2.50

0.82645

2.07

3

3.00

0.75131

2.25

3

TOTAL

127.85

“Therefore, the Intrinsic value of this stock will be $127.85”

NOTE

The Formula for calculating the Present Value Factor is [1/(1 + r)n], Where “r” is the Discount/Interest Rate and “n” is the number of years.

(b)-Expected Rate of Return on the Investment

Expected Rate of Return on the Investment = [(Intrinsic value – Purchase Price) / Purchase Price] x 100

= [($127.85 - $120.00) / $120.00] x 100

= [$7.85 / $120.00] x 100

= 6.54%


Similar Solved Questions

1 answers
Two objects have masses of #4 MG# and #8 MG#. How much does the gravitational potential energy between the objects change if the distance between them changes from #150 m# to #270 m#?
Two objects have masses of #4 MG# and #8 MG#. How much does the gravitational potential energy between the objects change if the distance between them changes from #150 m# to #270 m#?...
1 answers
3. You are conducting a randomized experiment on telepathy in which your experimental subjects have to...
3. You are conducting a randomized experiment on telepathy in which your experimental subjects have to take a test. A medium, i.e. a person with supernatural abilities, claims that she is able to influence other peoples' thoughts and feelings only through extra-sensory perception. You split your...
1 answers
Gary is a 55-year-old white man who began to experience chest discomfort while walking his dogs...
Gary is a 55-year-old white man who began to experience chest discomfort while walking his dogs with a friend. He tells his friend it is indigestion, but after his pain becomes a crushing sensation that begins to spread upward into his neck and lower jaw his friend called 911 on his cell phone. When...
1 answers
You have two samples of egg whites. The first sample is mixed with a bit of...
You have two samples of egg whites. The first sample is mixed with a bit of table salt and the second sample is mixed with a bit of white vinegar. Now both samples are placed in a frying pan. Would the samples cook faster than just egg whites themselves? If so, explain the chemistry behind it....
1 answers
- Google Chrome CenageNOW2 Online teaching and learn e n gage Lean ake Assignment Main.dolinvokereta AssignmentSessionLocator...
- Google Chrome CenageNOW2 Online teaching and learn e n gage Lean ake Assignment Main.dolinvokereta AssignmentSessionLocator assignment-takeinprogress=false Calculator Indicate whether the following actions would (4) increase (-) decrease or (0) not affect a company's total assets, liabilities,...
1 answers
QUESTION 1 If n-butane is chlorinated as shown below, approximately what percentage of the product mixture...
QUESTION 1 If n-butane is chlorinated as shown below, approximately what percentage of the product mixture will be 1-chlorobutane? hentai maa Cl2 hv 1-chlorobutane 2-chlorobutane OOOO...
1 answers
3. Chejuenolide A (below) was isolated from a particular species of marine bacteria. OH For each...
3. Chejuenolide A (below) was isolated from a particular species of marine bacteria. OH For each labeled carbon-carbon double bond, specify the stereochemistry: нс сн, N . Bond #1 (circle one: is E, is Z, is not e or Z) Bond #2 (circle one: is E, is Z, is not E or Z) Bond #3 ...
1 answers
Problem 4: An object is attached to a spring in such a way that it undergoes...
Problem 4: An object is attached to a spring in such a way that it undergoes simple harmonic motion with a period of 2 s. a) [3 points] What is the angular frequency of the oscillations? b) [3 points] If the mass of the object is 4 kg, what is the value of the spring constant, k? c) [2 points] If th...
1 answers
Please answer all parts of this question 2. Consider the junction potential a. Describe how and...
please answer all parts of this question 2. Consider the junction potential a. Describe how and why a junction potential occurs. What is the error, in terms of concentration, if a junction potential changes the true b. cell voltage by 1.50 millivolts in a potentiometric determination of an analyte...
1 answers
Chapter 34, Problem 041 A lens is made of a transparent material having an index of...
Chapter 34, Problem 041 A lens is made of a transparent material having an index of refraction of 1.40. One side of the lens is flat, and the other convex with a radius of curvature of 24.0 cm. (a) Find the focal length of the lens. (b) If an object is placed 120 cm in front of the lens, where will ...
1 answers
) Write the following series in sigma notation. Determine if the series converges and, if it...
) Write the following series in sigma notation. Determine if the series converges and, if it does, find the sum of the series. 5−3 +9/ 5 −27/ 25+81/ 125 −......
1 answers
(20 Points) If the radius of convergences for the power series Enso anx" is R, determine...
(20 Points) If the radius of convergences for the power series Enso anx" is R, determine the radius of convergence for the power series Enro anx2n? (Hint: Use the ratio test and see the form of R)....
1 answers
McNeil Corporation issued $800,000 of 12%, 10-year bonds payable on January 1, 2019. The market interest...
McNeil Corporation issued $800,000 of 12%, 10-year bonds payable on January 1, 2019. The market interest rate at the date of issuance was 10%, and the bonds pay interest semiannually (on June 30 and December 31). McNeil Corporation's year-end is June 30. Read the requirements. 1. Using the PV fu...
1 answers
Of O, reacted with ne Na? (b) What mass of Na reacted? (c) What mass of...
of O, reacted with ne Na? (b) What mass of Na reacted? (c) What mass of Na,O formed? When aluminum metal is exposed to oxygen coating of aluminum oxide forms on the surf aluminum. The balanced equation for the reaction of aluminum metal with oxygen gas is 22 Limitin 6.29 4Als) +302(g) 2ALO3(s) Suppo...
1 answers
C programming for the below question.. In this program we are going to test the performance...
C programming for the below question.. In this program we are going to test the performance of two searching codes. (a) Write a randomarray(n, max) function that returns a pointer to an array of size n integers, filled with random values between 0 and max. (b) Write a median(n, arr) function that re...
1 answers
Now let's actually predict the signs for this equilibrium at 100°C: H2O(liquid) =H2O(vapor) For each thermodynamic...
Now let's actually predict the signs for this equilibrium at 100°C: H2O(liquid) =H2O(vapor) For each thermodynamic parameter state if its value will be: positive, value, zero or unknown AH- AS AGE AH surroundings AS surroundings - AS universe 0 * 3? TWICE * 0 2Na(g) + 3N2(g) + 2NaN3(s) The A...
1 answers
An organization deploys a new system. After that they want to start system maintenance, reviewing that...
An organization deploys a new system. After that they want to start system maintenance, reviewing that system and measuring the overall system performance. In this scenario, how they can perform system maintenance, system review, and measure system performance? Explain it....
1 answers
How can I balance a chemical equation?
How can I balance a chemical equation?...

-- 0.045761--