Suppose Acap Corporation will pay a dividend of $2.80 per share at the end of this year and a dividend of $3 per share next year. You expect Acap's stock price to be $52 in two years. Assume that Acap's equity cost of capital is 10%. Complete the steps below using cell references to given data or previous calculations. In some cases, a simple cell reference is all you need. To copy/paste a formula across a row or down a column, an absolute cell reference or a mixed cell reference may be preferred. If a specific Excel function is to be used, the directions will specify the use of that function. Do not type in numerical data into a cell or function. Instead, make a reference to the cell in which the data is found. Make your computations only in the blue cells highlighted below. In all cases, unless otherwise directed, use the earliest appearance of the data in your formulas, usually the Given Data section. a. What price would you be willing to pay for a share of Acap stock today, if you planned to hold the stock for two years? b. Suppose instead you plan to hold the stock for one year. For what price would you expect to be able to sell a share of Acap stock in one year? C. Given your answer to (b), what price would you be willing to pay for a share of Acap stock today, if you planned to hold the stock for one year? How does this price compare to your answer in (a)? Dividend in 1 year Dividend in 2 years Share price in 2 years Equity cost of capital $ $ $ 2.80 3.00 52 10% a. What price would you be willing to pay for a share of Acap stock today, if you planned to hold the stock for two years? Holding period (years) Price per share b. Suppose instead you plan to hold the stock for one year. For what price would you expect to be able to sell a share of Acap stock in one year? Holding period (years) Price per share Price per share The price you would pay C. Given your answer to (b), what price would you be willing to pay for a share of Acap stock today, if you planned to hold the stock for one year? How does this price compare to your answer in (a)? affected by the amount of time you hold the stock.
Suppose Acap Corporation will pay a dividend of $2.80 per share at the end of this year and a dividend of $3 per share next year. You expect Acap's stock price to be $52 in two years. Assume that Acap's equity cost of capital is 10%. Complete the steps below using cell references to given data or previous calculations. In some cases, a simple cell reference is all you need. To copy/paste a formula across a row or down a column, an absolute cell reference or a mixed cell reference may be preferred. If a specific Excel function is to be used, the directions will specify the use of that function. Do not type in numerical data into a cell or function. Instead, make a reference to the cell in which the data is found. Make your computations only in the blue cells highlighted below. In all cases, unless otherwise directed, use the earliest appearance of the data in your formulas, usually the Given Data section. a. What price would you be willing to pay for a share of Acap stock today, if you planned to hold the stock for two years? b. Suppose instead you plan to hold the stock for one year. For what price would you expect to be able to sell a share of Acap stock in one year? C. Given your answer to (b), what price would you be willing to pay for a share of Acap stock today, if you planned to hold the stock for one year? How does this price compare to your answer in (a)? Dividend in 1 year Dividend in 2 years Share price in 2 years Equity cost of capital $ $ $ 2.80 3.00 52 10% a. What price would you be willing to pay for a share of Acap stock today, if you planned to hold the stock for two years? Holding period (years) Price per share b. Suppose instead you plan to hold the stock for one year. For what price would you expect to be able to sell a share of Acap stock in one year? Holding period (years) Price per share Price per share The price you would pay C. Given your answer to (b), what price would you be willing to pay for a share of Acap stock today, if you planned to hold the stock for one year? How does this price compare to your answer in (a)? affected by the amount of time you hold 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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Concept explainers
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.
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Question
Transcribed Image Text:Problem 7-10
Suppose Acap Corporation will pay a dividend of $2.80 per share at the end of this year and a dividend of
$3 per share next year. You expect Acap's stock price to be $52 in two years. Assume that Acap's equity
cost of capital is 10%.
Complete the steps below using cell references to given data or previous calculations. In some cases, a
simple cell reference is all you need. To copy/paste a formula across a row or down a column, an absolute
cell reference or a mixed cell reference may be preferred. If a specific Excel function is to be used, the
directions will specify the use of that function. Do not type in numerical data into a cell or function.
Instead, make a reference to the cell in which the data is found. Make your computations only in the blue
cells highlighted below. In all cases, unless otherwise directed, use the earliest appearance of the data in
your formulas, usually the Given Data section.
a. What price would you be willing to pay for a share of Acap stock today, if you planned to hold the
stock for two years?
b. Suppose instead you plan to hold the stock for one year. For what price would you expect to be able
to sell a share of Acap stock in one year?
C.
Given your answer to (b), what price would you be willing to pay for a share of Acap stock today, if
you planned to hold the stock for one year? How does this price compare to your answer in (a)?
Dividend in 1 year
Dividend in 2 years
Share price in 2 years
Equity cost of capital
C.
a. What price would you be willing to pay for a share of Acap stock today, if you planned to hold the
stock for two years?
Holding peri
(years)
$
$
$
2.80
3.00
52
10%
Price per share
b. Suppose instead you plan to hold the stock for one year. For what price would you expect to be able
to sell a share of Acap stock in one year?
Holding period (years)
Price per share
Price per share
The price you would pay
Given your answer to (b), what price would you be willing to pay for a share of Acap stock today, if
you planned to hold the stock for one year? How does this price compare to your answer in (a)?
affected by the amount of time you hold the stock.
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