What would an investor be willing to pay for common stock in

Reference no: EM13807670

1. What would an investor be willing to pay for common stock in a firm that is expected to pay an annual dividend that will grow at 10 percent over the next 2 years, then grow at 5 percent for 3 years and then stop growing (i.e., will grow at zero percent) from then on? The firm just paid its dividend of $2.00. Thus, if an investor buys this stock, they will not receive the dividend that was just paid. The next dividend will be paid in one year. The required rate of return is an effective annual rate of 10%.

2. The ABC Company currently has $16,000,000 in physical assets that have always generated a steady stream of earnings for the company. The management of the firm has always paid all of its earnings to shareholders as a dividend. While there is risk in the return on assets, the average return over many years has been steady at 10 percent. The firm has 1,000,000 shares outstanding. The current ex-dividend price of a share of equity is $15.00.

a. The management wants the company to grow. Rather than pay out all of the firm's earnings as a dividend this year (t = 0), the management wants to plow back 60 percent of the earnings into the business.

b.Assuming that the management will be able to maintain the return on assets it has achieved in the past as the firm grows, what will be the ex-dividend stock price under the new growth policy?

c. Given your answer in part b, should the management adopt this policy? Why or why not?

3. The ABC Company currently has $16,000,000 in physical assets that have always generated a steady stream of earnings for the company. The management of the firm has always paid all of its earnings to shareholders as a dividend. While there is risk in the return on assets, the average return over many years has been steady at 10 percent. The firm has 1,000,000 shares outstanding. The current ex-dividend price of a share of equity is $15.00. The management wants the company to grow. Rather than pay out all of the firm's earnings as a dividend this year (t = 0), the management wants to plow back 60 percent of the earnings into the business.

4. Assuming that the management will be able to maintain the return on assets it has achieved in the past as the firm grows.

a. Find the effective rate of a stated rate of 18.3 percent compounded monthly.

b. Find the effective rate of a stated rate of 18.4 percent compounded continuously.

c. Find the effective rate of a stated rate of 18.4 percent compounded every 6 months.

d. Find the effective rate of a stated rate of 18.5 percent compounded annually.

e. Using the result you can infer from comparing c and d above, answer the following question. After your have made 180 monthly payments, what is the remaining principle?

5. You have taken out a 30-year fixed-rate mortgage for $500,000.00 that requires you to make a fixed monthly payment every month for the next 360 months, with the first payment being made exactly one month from now. The stated interest rate is 4 percent, compounded monthly.

a. Right after you make your first payment, what is the present value of the remaining monthly payments compares to your answer to c above? Greater than, Equal to or Less than?

A.Greater than

B.Equal to

C.Less than

Reference no: EM13807670

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