The current price of Houston Tennis Inc. Stock is $50. Dividends are expected to

Question

The current price of Houston Tennis Inc. Stock is $50. Dividends are expected to grow at 4% indefinitely and last dividend was $2.0. What is the required rate of return on Houston Tennis Inc.?

You borrow $2,000 to buy a car at 12% interest compounded monthly. How much are your monthly payments if your plan to pay off the auto in three years? [PVIFA(1,36)=30.1114].

How much would you be willing to pay for an investment which paid you $100 at the end of each year for seven years? Assume you can earn 12% a year on other types of investments.

Explanation / Answer

1.The required rate of return on Houston Tennis Inc. is 8.16%

Following the dividend growth model , P0 = D0 ( 1+g) / K-g, where P0 is the current stock price, D0 the last dividend, and g the growth rate in dividends.Let the required rate of return be K.

50 = (2.0 x 1.04) / K - 0.04 or K is 8.16%

2. Monthly payments = P / PVIFA1%, n=36 =2,000 / 30.1114 = $ 66.42

3. Present value of the annuity = Annuity x PVIFA 1%, 7 years = $ 100 x 4.5638 = $ 456.38

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