Fin 313 | Business Finance I ANSWER SHEET Student ID Last Name First Name Sectio

Question

Fin 313 | Business Finance I ANSWER SHEET Student ID Last Name First Name Section 2: Problem sols ing questions (Demonstrate your calculation steps to receive partial eredit) P1 (15 points); Jen's Fashions the growth rate falling off to a constant 8percent annual dividend. What is the curretereafter. The required return is 12 percent and the company just paid a $3.80 is growing quickly. Dividends are expected to grow at a 19 percent rate for the next 3 years, with share price? P21 15 points): A taxable bond has a yield of 8%, and a municipal bond has a yield of 6% " If you are in a 40% tax bracket, which bond do you prefer? * At what tax rate would you be indifferent between the two bonds?

Explanation / Answer

Answer to P1:

Last Dividend, D0 = $3.80

Growth rate for first three years is 19%, followed by a constant growth rate (g) of 8%

D1 = $3.8000 * 1.19 = $4.5220
D2 = $4.5220 * 1.19 = $5.3812
D3 = $5.3812 * 1.19 = $6.4036
D4 = $6.4036 * 1.08 = $6.9159

Required Return, r = 12%

P3 = D4 / (r - g)
P3 = $6.9159 / (0.12 - 0.08)
P3 = $172.8975

P0 = $4.5220/1.12 + $5.3812/1.12^2 + $6.4036/1.12^3 + $172.8975/1.12^3
P0 = $135.95

So, current share price is $135.95

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