Question

The market price of a stock is $30.30 and it is expected to pay a $2.38 dividend next year. The dividend is expected to grow at 2.36% forever. What is the required rate of return for the stock?

Answer format: Percentage Round to: 0 decimal places (Example: 9%, % sign required. Will accept decimal format rounded to 2 decimal places (ex: 0.09))

Caspian Sea Drinks is considering buying the J-Mix 2000. It will allow them to make and sell more product. The machine cost $1.80 million and create incremental cash flows of $867,471.00 each year for the next five years. The cost of capital is 10.86%. What is the net present value of the J-Mix 2000?

Answer format: Currency: Round to: 2 decimal places.

The risk-free rate is 1.93% and the market risk premium is 6.29%. A stock with a β of 1.18 just paid a dividend of $2.79. The dividend is expected to grow at 23.27% for five years and then grow at 4.14% forever. What is the value of the stock?

Answer format: Currency: Round to: 2 decimal places.

i would really appreciate the help!! :) would be great if you could show the steps (not excel) for better understanding. Thank You!

Answer 1

a. The required rate of return is computed as shown below:

= Expected dividend next year / current stock price + growth rate

= $ 2.38 / $ 30.30 + 0.0236

= 10.21% Approximately

b. The net present value is computed as shown below:

= - $ 1,800,000 + $ 867,471 / 1.1086¹ + $ 867,471 / 1.1086² + $ 867,471 / 1.1086³ + $ 867,471 / 1.1086⁴ + $ 867,471 / 1.1086⁵

= $ 1,417,406.67 Approximately

c. The value of the stock is computed as shown below:

cost of capital is computed as shown below:
Risk free rate + beta x risk premium

= 0.0193 + 1.18 x 0.0629

= 9.3522%

Dividend at end of year 1 is computed as follows:

= $ 2.79 x 1.2327

= $ 3.439233

Dividend at end of year 2 is computed as follows:

= $ 2.79 x 1.2327²

= $ 4.239543 Approximately

Dividend at end of year 3 is computed as follows:

= $ 2.79 x 1.2327³

= $ 5.226084 Approximately

Dividend at end of year 4 is computed as follows:

= $ 2.79 x 1.2327⁴

= $ 6.442194 Approximately

Dividend at end of year 5 is computed as follows:

= $ 2.79 x 1.2327⁵

= $ 7.941292 Approximately

Dividend at end of year 6 is computed as follows:

= $ 7.941292 x 1.0414

= $ 8.270061 Approximately

So the price will be as follows:

= $ 3.439233 / 1.093522 + $ 4.239543 / 1.093522² + $ 5.226084 / 1.093522³ + $ 6.442194 / 1.093522⁴ + $ 7.941292 / 1.093522⁵ + 1 / 1.093522⁵ [ ( $ 8.270061 / ( 0.093522 - 0.0414 ) ]

= $ 121.74 Approximately

Feel free to ask in case of any query relating to this question