7-14 and 7-18
SOLUTION:-
7-14
Present value (PV) = sum of present value of all future cash flows
Assuming returns are generated from dividends only,
After end of 2 years there is a perpetuity model with constant dividend growth which can be calculated using the formula Dividend * (1+ dividend growth rate)/ (return rate - growth rate) which needs to be discounted back from year 2 to year 0 (present value)
PV = 2/(1+15%)^2+ 2*(1+5%)/(15%-5%)/(1+15%)^2
=$17.39
7-18
Price range of stock can be calculated as follows:-
Price earnings ratio of N stock is between 28 and 30. earnings per share are $4
Price range=(Price earning ratio of lower value x EPS to Price earning ratio of higher value x EPS)
=(28 x 4 to 30 x 4)
So the price range is 112 to 120$.
It shows the sum of money you are ready to pay for each dollar worth of the earnings of the company
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