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 6 percent over the next four years. The required rate of return is 18 percent (this will als 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. 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.) Anticipated Value D1 D2 D3 D4 b. Calculate the present value of each of the anticipated dividends at a discount rate of 18 percent. (Do not round intermediate calculations. Round your final answers to 2 decimal places. PV of Dividends D1 D2 D3 D4 Total 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 at Year 4 d. Calculate the present value of the year 4 stock price at a discount rate of 18 percent. (Do not round intermediate calculations. Round your final answer to 2 decimal places.) Present value of Year 4 stock price

Explanation / Answer

c) P4 = D4 x (1 + g) / (r - g) = 5.05 x (1 + 6%) / (18% - 6%) = $44.61

d) PV (P4) = P4 / (1 + r)^4 = 44.61 / (1 + 18%)^4 = $23.00

e) Current Value = 12.33 + 23.00 = $35.33

f) P0 = D1 / (ke - g) = 4.24 / (18% - 6%) = $35.33

g) Stock Price = 5.7 x 1.2 x 6 = $41.04

h) Difference = 41.04 - 35.33 = $5.71

i) If D1 increases, Price increases

If Ke increases, Price decreases

If g increases, Price increases.

Year Dividend PV (Div) 1 4.24 3.59 2 4.49 3.23 3 4.76 2.90 4 5.05 2.60 Total 12.33

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