Section 2: Problem solving questions; (Demonstrate your calculation steps to rec

Question

Section 2: Problem solving questions; (Demonstrate your calculation steps to receive partial credit) Pl (15 points): Jen's Fashions is growing quickly. Dividends are expected to grow at a 19 percent rate for the next 3 years, wit the growth rate falling off to a constant 8 percent thereafter. The required return is 12 percent and the company just paid a 53.80 annual dividend. What is the current share price? P2 (15 points). A taxable bond has a yield of 8%, and a municipal bond has a yield of 6%. " If you are in a 40% tax bracket, which bond do you prefer? At what tax rate would you be indifferent between the two bonds? "

Explanation / Answer

Prob.1) 2 period Dividend discount model = (i) Growth period = year dividend PV factor PV 1 3.8 x 1.19 4.522 0.892857 4.0375 2 4.522 x 1.19 5.38118 0.797194 4.289844 3 5.38118 x 1.19 6.403604 0.71178 4.557959 12.8853 (ii) Horizon period - D4 = D3 x 1.08 6.915893 Re-g = (0.12-0.08) 0.04 P3 = D4/(Re-g) 172.8973 PV of Cash flows today = 172.8973/(1.12^3)= 123.0649 (iii) Po = (i) + (ii) Po = 12.8853 + 123.0649 = 135.9502 Please provide feedback…. Thanks in advance…. :-) As per chegg guidelines we are asked to solve 1 question at a time so please post the other question separately

Related Questions

Navigate

• Browse (All)
• Browse S
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.