2) Potential stock purchase Wally is thinking about using cash on hand to make some investments. One of these investments is into Jalcville Farms (TF). TF's stock is trading at $45. Wally wants you to determine if that is a fair price for the stock. Wally notes that TF just paid a dividend of $3.20 on its stock. The growth rate in dividends is expected to be a constant 5 percent per year indefinitely. Waily indicates that the company - like most all TF Investors - would require a 15 percent return on the stock for the first three years, a 13 percent return for the next three years, and an 11 percent return thereafter. (a) What is the current share price implied by the information above? (b) Should Wally buy the stock given its current trading price of $45? (c) If the required rate of return were ½ the rates outlined above- and assuming no other changes to the situation outlined above - should Wally still purchase the stock| (d) If the growth rate in dividends was higher than the 5% indicated above - and assuming no other changes to the situation outlined above - should Wally purchase the stock?
2) Potential stock purchase Wally is thinking about using cash on hand to make some investments. One of these investments is into Jalcville Farms (TF). TF's stock is trading at $45. Wally wants you to determine if that is a fair price for the stock. Wally notes that TF just paid a dividend of $3.20 on its stock. The growth rate in dividends is expected to be a constant 5 percent per year indefinitely. Waily indicates that the company - like most all TF Investors - would require a 15 percent return on the stock for the first three years, a 13 percent return for the next three years, and an 11 percent return thereafter. (a) What is the current share price implied by the information above? (b) Should Wally buy the stock given its current trading price of $45? (c) If the required rate of return were ½ the rates outlined above- and assuming no other changes to the situation outlined above - should Wally still purchase the stock| (d) If the growth rate in dividends was higher than the 5% indicated above - and assuming no other changes to the situation outlined above - should Wally purchase the stock?
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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2) Potential stock purchase
Wally is thinking about using cash on hand to make some investments. One of these
investments is into Talcville Farms (TF). TF's stock is trading at $45. Wally wants you to
determine if that is a fair price for the stock. Wally notes that TF just paid a dividend of $3.20 on
its stock. The growth rate in dividends is expected to be a constant 5 percent per year
indefinitely. Wailly indicates that the company - like most all TF Investors - would require a 15
percent return on the stock for the first three years, a 13 percent return for the next three years,
and an 11 percent return thereafter.
(a) What is the current share price implied by the information above?
(b) Should Wally buy the stock given its current trading price of $45?
(c) If the required rate of return were ½ the rates outlined above - and assuming no other
changes to the situation outlined above - should Wally still purchase the stock|
(d) If the growth rate in dividends was higher than the 5% indicated above - and assuming
no other changes to the situation outlined above - should Wally purchase the stock?
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