The Hugh Co. expects to pay a cash dividend of $2.5 per share next year. Investo
ID: 2706381 • Letter: T
Question
The Hugh Co. expects to pay a cash dividend of $2.5 per share next year. Investors require a 14% return from investments such as this. If the dividend is expected to grow at a steady 5% per year, what will the stock be worth in five years?
A $33.72
B $35.45
C $39.67
D $37.58
Which of the following statements is false concerning the term structure of interest rates?
A The real rate of return has minimal, if any, effect on the slope of the term structure of interest rates.
B The term structure of interest rates includes both an inflation premium and an interest rate risk premium.
C If interest rates are expected to increase in the future, the graph depicting the term structure of interest rates will be downward-sloping.
D Expectations of lower inflation rates in the future tend to lower the slope of the term structure of interest rates.
A firm just paid a dividend of $2.2. The dividend is expected to grow at a 25% rate for the next 3 years and at a 7% rate thereafter. What is the value of the stock if the required rate of return is 12%?
a.
$87.60
b.
$80.41
c.
$73.70
d.
$60.03
A $33.72
B $35.45
C $39.67
D $37.58
The Hugh Co. expects to pay a cash dividend of $2.5 per share next year. Investors require a 14% return from investments such as this. If the dividend is expected to grow at a steady 5% per year, what will the stock be worth in five years? Which of the following statements is false concerning the term structure of interest rates?Explanation / Answer
The correct answer is B $35.45
P0= D1/(Ke-g)
Given, D1= 2.5
Ke= 14%
g= 5%
Therefore,
P0= 2.5/(.14-.05)= $27.78
Pn= P0x(1+g)^n
so, P5= Pox(1+g)^5
P5= 27.78x1.05^5= 35.45
C If interest rates are expected to increase in the future, the graph depicting the term structure of interest rates will be downward-sloping.
The answer is (c) $73.70
value of the stock= (2.2x1.25/1.12)+((2.2x1.25^2/1.12^2)+(2.2x1.25^3/1.12^3)+{(2.2x1.25^3x1.07/[1.12^3(.12-.07)]}
= 2.46+2.74+3.058+65.45
= $73.70
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