t he stock for a start-up company probably will pay no dividends until exactly 8

Question

t he stock for a start-up company probably will pay no dividends until exactly 8 years from today. At that time it will pay S6.20 per year forever. You assess the intrinsic value of the stock with a 8.7% discount rate. Find the stock's intrinsic value today. a. $39.74b. $41.77 C. $43.82 d. $45.39 e. $47.17 5. The company preferred stock just yesterday paid its annual dividend of $4.15 per share. Today's share price is S41.23. You believe the dividend yield is abnormally high but that it will revert to its normal v for 4 years. Upon receiving the last dividend you expect the dividend yield will be normal. Your strategy is to sell the stock at that time. Compute the expected annual rate of return for the strategy alue of 5.80%. Your strategy is to buy the stock today and receive annual dividends a. 18.34% b, 19.17% c. 22. 10% d, 23.16% e. 24.11% 6. The rates of return listed below for securities X and Y are equally likely. Find the standard

Explanation / Answer

1) Value of the stock at the beginning of the 7th year using the zero growth dividend formula = 6.20/0.087 = $             71.26 Intrinsic value today = 71.26/1.087^7 = $             39.74 Answer Answer: Option [a] 2) Price at the end of the 4th year = 4.15/0.058 = $             71.55 Cash flows for the 4 years: Year Cash flow PVIFA at 25% PV at 25% PVIF at 24% PV at 24% PVIF at 23% PV at 23% 0 -41.23 1.0000 -41.23 1 -41.23 1 -41.23 1 4.15 0.8000 3.32 0.8065 3.35 0.8130 3.37 2 4.15 0.6400 2.66 0.6504 2.70 0.6610 2.74 3 4.15 0.5120 2.12 0.5245 2.18 0.5374 2.23 4 75.70 0.4096 31.01 0.4230 32.02 0.4369 33.07 IRR = 23+0.19/(0.99+0.19) = 23.16% -2.12 -0.99 0.19 Answer: Option [d]

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