Fundamentals of Corporate Finance (7th Edition) Brealey Chapter 7, #44CP. Beside
ID: 2640172 • Letter: F
Question
Fundamentals of Corporate Finance (7th Edition) Brealey
Chapter 7, #44CP.
Besides the 6 questions asked for this problem my professor has asked addtional questions.
9. Use this information to draw a conclusion about the relationship between the sustainable growth rate and the discount rate.
Need help with Questions 7 - 9. Thanks!
Better Mousetraps, Inc. has developed an improvement on their main product. As a result, the firm expects growth of 20% per year for the next 4 years. By then, their competitors will have caught up to their technology, competition will drive down profit margins, and the sustainable growth rate will fall to 5%. The most recent annual dividend was $1 per share. Assume a discount rate of 10%. 1. What are the expected values of the next four dividends? 2. What is the expected stock price 4 YEARS FROM NOW? 3. What is the stock's intrinsic value today? 4. If this accurately reflects the current stock price, what is the dividend yield today? 5. What is the expected stock price NEXT YEAR? 6. What is the expected rate of return to an investor who buys the stock now and sells it IN ONE YEAR?Explanation / Answer
7,
When 6%
When 7%
When 8%
When 9%
8. For each one percent increase in the sustainable growth rate, by what percent does the stock price rise?
20%
1 DIV1 = $ 1.20 DIV2 = $ 1.44 DIV3 = $ 1.728 DIV4 = $ 2.0736 2 DIV4 = $ 2.0736 Stock price (P4) = $ 43.5456 3 DIV1 = $ 1.20 DIV2 = $ 1.44 DIV3 = $ 1.728 DIV4 = $ 2.0736 Stock price (P4) = $ 43.5456 Stock price (P0) = $ 34.738 4 Stock price (P0) $34.73779 Dividend yield = 3.45% 5 Stock price (P1) = $ 37.012 6 Stock price (P0) $ 34.738 Stock price (P1) $ 37.012 Expected rate of return = 10.00%Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.