Answer the following questions. Table 6-4 or Table 6-5. (Use appropriate factor(s) from the tables provided. Round the PV factors to 4 decimals.) Required: a. Spencer Co's common stock is expected to have a dividend of $5 per share for each of the next 14 years, and it is estimated that the market value per share will be $143 at the end of 14 years. If an investor requires a return on investment of 8%, what is the maximum price the investor would be willing to pay for a share of Spencer Co. common stock today?
Dividend Valuation
Dividend refers to a reward or cash that a company gives to its shareholders out of the profits. Dividends can be issued in various forms such as cash payment, stocks, or in any other form as per the company norms. It is usually a part of the profit that the company shares with its shareholders.
Dividend Discount Model
Dividend payments are generally paid to investors or shareholders of a company when the company earns profit for the year, thus representing growth. The dividend discount model is an important method used to forecast the price of a company’s stock. It is based on the computation methodology that the present value of all its future dividends is equivalent to the value of the company.
Capital Gains Yield
It may be referred to as the earnings generated on an investment over a particular period of time. It is generally expressed as a percentage and includes some dividends or interest earned by holding a particular security. Cases, where it is higher normally, indicate the higher income and lower risk. It is mostly computed on an annual basis and is different from the total return on investment. In case it becomes too high, indicates that either the stock prices are going down or the company is paying higher dividends.
Stock Valuation
In simple words, stock valuation is a tool to calculate the current price, or value, of a company. It is used to not only calculate the value of the company but help an investor decide if they want to buy, sell or hold a company's stocks.
 or [Table 6-5](link). (Use appropriate factor(s) from the tables provided. Round the PV factors to 4 decimals.)**
**Required:**
**a.** Spencer Co.'s common stock is expected to have a dividend of $5 per share for each of the next 14 years, and it is estimated that the market value per share will be $143 at the end of 14 years. If an investor requires a return on investment of 8%, what is the maximum price the investor would be willing to pay for a share of Spencer Co. common stock today?
**b.** Mario bought a bond with a face amount of $1,000, a stated interest rate of 6%, and a maturity date 12 years in the future for $989. The bond pays interest on an annual basis. Three years have gone by and the market interest rate is now 14%. What is the market value of the bond today?
**c.** Alexis purchased a U.S. Series EE savings bond for $150, and ten years later received $389.11 when the bond was redeemed. What average annual return on investment did Alexis earn over the ten years?
**Explanation of the Required Calculations:**
- **Present Value (PV) of Dividends and Market Value (for Question a):** Use the present value formula for each dividend payment and the market value at the end of 14 years. Summing these up will give the maximum price an investor would be willing to pay today.
- **Bond Market Value (for Question b):** Use the current market interest rate to discount the future bond payments (both interest and principal) back to their present value.
- **Average Annual Return (for Question c):** The average annual return can be found using the formula for compound interest, solving for the interest rate.
**Table References:**
- **Table 6-4:** Typically, this table is for the Present Value Interest Factors for a Single Sum.
- **Table 6-5:** Typically, this table is for the Present Value Interest Factors of an Annuity.
These tables provide the factors needed to calculate the present value of future cash flows discounted at various interest rates for different time periods. Being proficient in interpreting and using these tables is essential for accurately performing time value of money calculations.](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2F432d0e5b-976a-477c-8f94-be3c5e253b00%2F8938a88c-49b9-4a0d-b830-60dc2bfd37ec%2F52dxqkt_processed.png&w=3840&q=75)
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