1. Two investors are evaluating Apple\'s stock for possible purchase. They agree
ID: 2382701 • Letter: 1
Question
1. Two investors are evaluating Apple's stock for possible purchase. They agree on the expected value of D1, and on the expected future dividend growth rate. Further, they agree on the riskiness of the stock. However, one investor normally holds stocks for 2 years, while the other holds stocks for 10 years. On the basis of the analysis done in this chapter, should they both be willing to pay the same price for Apple's stock? Explain.
2. Silverado Mining Company's ore reserves are being depleted, so its sales are falling. Also, because of environmental issues, its pit is getting deeper each year so its costs are rising. As a result, the company's earnings and dividends are declining at the constant rate of 5% per year. If Do = $5 and Rs =15%, what is the value of Silverado Mining's stock?
YOU MUST SHOW YOUR CALCULATIONS TO EARN ANY CREDIT.
Explanation / Answer
Answer:1 Yes. The value of a share of stock is the PV of its expected future dividends. If the two investors expect the same future dividend stream, and they agree on the stock’s riskiness, then they should reach similar conclusions as to the stock’s value.
Answer:2 The value of Silverado Mining's stock is:
D1=D0(1+g)
g=-0.05
=$5(1-0.05)
=$4.75
P0 = D1/(r-g)
Price=$4.75/(0.15+0.05)
=$23.75
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