Beasley Ball Bearings paid a $4 dividend last year. The dividend is expected to

Question

Beasley Ball Bearings paid a $4 dividend last year. The dividend is expected to grow at a constant rate of 3 percent over the next four years. The required rate of return is 12 percent (this will also serve as the discount rate in this problem). Use Appendix B for an approximate answer but calculate your final answer using the formula and financial calculator methods. http://ezto-cf-media.mheducation.com/Media/Connect_Production/bne/finance/Block_16e/Appendix_B.jpg
  
a. Compute the anticipated value of the dividends for the next four years. (Do not round intermediate calculations. Round your final answers to 2 decimal places.)
  

  
b. Calculate the present value of each of the anticipated dividends at a discount rate of 12 percent. (Do not round intermediate calculations. Round your final answers to 2 decimal places.)
  

  
c. Compute the price of the stock at the end of the fourth year (P4). (Do not round intermediate calculations. Round your final answer to 2 decimal places.)
  

Stock Price of year 4: __________
  
d. Calculate the present value of the year 4 stock price at a discount rate of 12 percent. (Do not round intermediate calculations. Round your final answer to 2 decimal places.)
  

Present value of year 4 stock price:___________
  
e. Compute the current value of the stock. (Do not round intermediate calculations. Round your final answer to 2 decimal places.)
  

Current Value:____
  
f. Use the formula given below to show that it will provide approximately the same answer as part e. (Do not round intermediate calculations. Round your final answer to 2 decimal places.)    
  

D1

    
Current Value:_____
  
g. If current EPS were equal to $5.15 and the P/E ratio is 1.2 times higher than the industry average of 8, what would the stock price be? (Do not round intermediate calculations. Round your final answer to 2 decimal places.)
  

Stock Price: _____
  
h. By what dollar amount is the stock price in part g different from the stock price in part f? (Do not round intermediate calculations. Round your final answer to 2 decimal places.)
  

Amount: _____
  
i. With regard to the stock price in part f, indicate which direction it would move if:
  

Explanation / Answer

Ans b) D2 = 4.24/(1.12)^2 = $3.38

Totat = $13.03

Ans c) Stock price of year = 4.5*1.03/(.12 - .03) = $51.5

Ans d) Present value = $51.5/(1.12)^4 = $32.73

Ans e) Current value = PV of all dividend + PV of year 4 stock

= $13.03 + $32.73 = $45.76

ans f) P0 = 4.12/(.12 - .03) = $45.78

Ans g) Price per share = EPS * P/E * 1.2 = $49.44

ans h) Amount = $3.66

Ans i) if D1 increase then stock price will increase

If ke increase then stock price will decrease

If g increase then stock price will increase.

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