Computing present value of stock by retention rate on equity

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Reference no: EM1310270

1) Annuity A makes annual year-end payments of= $976.50 for each of next ten years, whereas investment B makes annual year-end payments of= $600 per year forever.

Illustrate your work for following two questions:

a) At what interest rate would you be unconcerned between 2 investments?

b) At interest rates above/below this break-even rate, which investment would you select and explain why?

2) Company’s earnings are expected to rise at 25% for 2 years. It presently pays the dividend of= $1.00 and plans to carry on increasing its dividend at sustainable growth rate of= 9.1%. Following the first 2 years, company will sustain a 65% retention rate and experience the return on equity of 14%. The required rate of return for investor is 12.5%. Compute the present value of the stock is?

Reference no: EM1310270

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