Exercise 4-3 Please use the following information for questions 1-4 (be careful
ID: 2799126 • Letter: E
Question
Exercise 4-3 Please use the following information for questions 1-4 (be careful about rounding). Stock A pays a dividend of $3 per share next year. The constant growth rate of the dividend is 5% every year. The discount rate is 10%. 1. If you hold the stock for one year, what is the price for stock A you have to pay now (PO)? A), $60 B) $63 , C) $30 D) $55 ,JE) None of the above 2. If you hold the stock for two years, what is the price for stock A you have to pay now (PO)? A) S61 B) $62 C) $63 D) $55 E) None of the above 3. If you hold the stock for three years, what would be the price for stock A thr years from now (P3)? A) $60 B) $63 C) $69 D) $55 E) None of the above 4. If you hold the stock for two years, what would be the price for stock A two ye from now (P2)? A) $60 B) S63 C) $66 D) $55 E) None of the above Please use the following information for questions 5-48 2006 The discourExplanation / Answer
1. A. $60
Price of stock = D1 / (K-g)
= 3 / (0.1-0.05)
= $60
2. E. None of the above
Dividend in second year = 3*1.05 = $3.15
Present value of all cash flows at end of 2nd year = 3.15 / (0.1-0.05)
= $63
$60.0
3. E. None of the above
Price of stock 3 years from now = 3.3 / (0.1-0.05)
= $66.15
4. B. $63
Price of stock = 3.15 / (0.1-0.05)
= $63
Tenor Cash flow Discount factor present value 1 $3 $0.909 $2.7 1 $63 $0.909 $57.3$60.0
Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.