Q1) Superlative Engineering, Ltd has been growing at a non-constant, supernormal
ID: 2790718 • Letter: Q
Question
Q1) Superlative Engineering, Ltd has been growing at a non-constant, supernormal rate of 20% and this will last for the next three years. The last dividend paid by the company was $6.00. From that point onwards Superlative Engineering will grow at a rate of 6% indefinitely. If the company’s required rate of return is 16%, what is the value of the stock today?
Q2)
A new investment on the market promises to pay you $2142 per year forever in exchange for a payment today of $28,000. What is the interest rate earned on the investment?
Explanation / Answer
1)
Price = PV of dividends + PV of terminla value
Terminla value = D*(1+g) / (r-g)
= 6*(1+20%)3*(1+6%) / (16%-6%) = 109.9008
Price = 6*(1+20%) / (1+16%) + 6*(1+20%)2 / (1+16%)2 + 6*(1+20%)3 / (1+16%)3+ 109.9008 / 1+16%)3 =
= 89.6790
2)
its perpetuity
r = annual payments / Intial investment
= 2142 / 28000
= 7.65%
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