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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?

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?

FINANCIAL ACCOUNTING
FINANCIAL ACCOUNTING
10th Edition
ISBN:9781259964947
Author:Libby
Publisher:Libby
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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**Answer the following questions. [Table 6-4](link) 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.
Transcribed Image Text:**Answer the following questions. [Table 6-4](link) 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.
## Table 6.4: Factors for Calculating the Present Value of $1 ### Introduction: This table is used to determine the present value of $1 over multiple periods at various discount rates. It is a key financial tool in time value of money calculations, helping to understand how much a future sum of money is worth in today’s terms. ### Table Columns and Rows: - **Column 1:** **No. of Periods** - This column lists the number of periods (typically years) over which the present value is being calculated. - **Columns 2-11:** **Discount Rates (2% - 20%)** - These columns display the present value factors for different discount rates ranging from 2% to 20%. ### How to Read the Table: 1. **Identify the Number of Periods:** - Select the number of periods from the first column. 2. **Select the Discount Rate:** - Choose the column corresponding to the desired discount rate. 3. **Find the Intersection:** - Locate the intersection of the identified period row and discount rate column. This value is the present value factor for $1. ### Example Usage of the Table: - To find the present value of $1 to be received in 10 years with a discount rate of 10%: - Locate the row for 10 periods. - Move across to the column under the 10% discount rate. - The intersection point is 0.386, which means the present value of $1 received in 10 years at a 10% discount rate is $0.386. ### Detailed Breakdown: The table below provides the present value factors for $1 over a period of 50 years and for various discount rates. | **No. of Periods** | **2%** | **4%** | **6%** | **8%** | **10%** | **12%** | **14%** | **16%** | **18%** | **20%** | |:-----------------:|:------:|:------:|:------:|:------:|:------:|:------:|:------:|:------:|:------:|:------:| | 1 | 0.980 | 0.9615 | 0.9434 | 0.9259 | 0
Transcribed Image Text:## Table 6.4: Factors for Calculating the Present Value of $1 ### Introduction: This table is used to determine the present value of $1 over multiple periods at various discount rates. It is a key financial tool in time value of money calculations, helping to understand how much a future sum of money is worth in today’s terms. ### Table Columns and Rows: - **Column 1:** **No. of Periods** - This column lists the number of periods (typically years) over which the present value is being calculated. - **Columns 2-11:** **Discount Rates (2% - 20%)** - These columns display the present value factors for different discount rates ranging from 2% to 20%. ### How to Read the Table: 1. **Identify the Number of Periods:** - Select the number of periods from the first column. 2. **Select the Discount Rate:** - Choose the column corresponding to the desired discount rate. 3. **Find the Intersection:** - Locate the intersection of the identified period row and discount rate column. This value is the present value factor for $1. ### Example Usage of the Table: - To find the present value of $1 to be received in 10 years with a discount rate of 10%: - Locate the row for 10 periods. - Move across to the column under the 10% discount rate. - The intersection point is 0.386, which means the present value of $1 received in 10 years at a 10% discount rate is $0.386. ### Detailed Breakdown: The table below provides the present value factors for $1 over a period of 50 years and for various discount rates. | **No. of Periods** | **2%** | **4%** | **6%** | **8%** | **10%** | **12%** | **14%** | **16%** | **18%** | **20%** | |:-----------------:|:------:|:------:|:------:|:------:|:------:|:------:|:------:|:------:|:------:|:------:| | 1 | 0.980 | 0.9615 | 0.9434 | 0.9259 | 0
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