CONTEMP.FINANCIAL MGMT. (LL)-W/MINDTAP
14th Edition
ISBN: 9780357292877
Author: MOYER
Publisher: CENGAGE L
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Chapter 7, Problem 22P
Summary Introduction
To determine: Current value of stock.
Given information:
Earning growth rate for starting three years will be = 50%
Earning growth rate for following three years will be = 25%
After that earning growth rate will be = 8%
Required equity return will be 20% (2-4 years), afterwards 50%
Calculation of current value of stock:
| Year | Earnings ($) | Dividends ($) |
| 0 | 1.00 | 0.00 |
| 1 | 1.50 | 0.00 |
| 2 | 2.25 | 0.45 |
| 3 | 3.375 | 0.675 |
| 4 | 4.219 | 0.844 |
| 5 | 5.273 | 2.637 |
| 6 | 6.592 | 3.296 |
| 7 | 7.119 | 3.560 |
Here,
Here,
FV refers to future value of investment,
i is interest rate,
n is number of periods,
PVIF refers to a used for calculation.
Hence, the price of stock will be $13.21
Expert Solution & Answer
Explanation of Solution
Given information:
Earning growth rate for starting three years will be = 50%
Earning growth rate for following three years will be = 25%
After that earning growth rate will be = 8%
Required equity return will be 20% (2-4 years), afterwards 50%
Calculation of current value of stock:
| Year | Earnings ($) | Dividends ($) |
| 0 | 1.00 | 0.00 |
| 1 | 1.50 | 0.00 |
| 2 | 2.25 | 0.45 |
| 3 | 3.375 | 0.675 |
| 4 | 4.219 | 0.844 |
| 5 | 5.273 | 2.637 |
| 6 | 6.592 | 3.296 |
| 7 | 7.119 | 3.560 |
Here,
Here,
FV refers to future value of investment,
i is interest rate,
n is number of periods,
PVIF refers to a used for calculation.
Hence, the price of stock will be $13.21
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3. Owen expects to receive $20,000 at the beginning of next year from a trust fund. If a
bank loans money at an interest rate of 7.5%, how much money can he borrow from
the bank based on this information?
A. $12879.45
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Chapter 7 Solutions
CONTEMP.FINANCIAL MGMT. (LL)-W/MINDTAP
Ch. 7 - Prob. 1QTDCh. 7 - Prob. 2QTDCh. 7 - Prob. 3QTDCh. 7 - Prob. 4QTDCh. 7 - Prob. 5QTDCh. 7 - Prob. 6QTDCh. 7 - Prob. 7QTDCh. 7 - Prob. 8QTDCh. 7 - Prob. 9QTDCh. 7 - Prob. 10QTD
Ch. 7 - Prob. 11QTDCh. 7 - Prob. 12QTDCh. 7 - Prob. 13QTDCh. 7 - Prob. 14QTDCh. 7 - Prob. 15QTDCh. 7 - Prob. 16QTDCh. 7 - Prob. 17QTDCh. 7 - Prob. 18QTDCh. 7 - Prob. 1PCh. 7 - Prob. 2PCh. 7 - Prob. 3PCh. 7 - Prob. 4PCh. 7 - Prob. 5PCh. 7 - Prob. 6PCh. 7 - Prob. 7PCh. 7 - Prob. 8PCh. 7 - Prob. 9PCh. 7 - Prob. 10PCh. 7 - Prob. 11PCh. 7 - Prob. 12PCh. 7 - Prob. 13PCh. 7 - Prob. 14PCh. 7 - Prob. 15PCh. 7 - Prob. 16PCh. 7 - Prob. 17PCh. 7 - Prob. 18PCh. 7 - Prob. 19PCh. 7 - Prob. 20PCh. 7 - Prob. 21PCh. 7 - Prob. 22PCh. 7 - Prob. 23PCh. 7 - Prob. 24PCh. 7 - Prob. 25PCh. 7 - Prob. 26PCh. 7 - Prob. 27PCh. 7 - Prob. 28PCh. 7 - Prob. 29P
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