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nld-1 Q https://www mathd.com Student PlayerHomework.aspx?homeworkld:4608S6437&questio; Secure FINA2230 BUSINESS FINANCE WINTER 2017 Sarah Sed acek&I; 12/20/17 4:47 PM Homework: Chapter 7 Score: 0 of 1 pt P7-22 (similar to) Save 11 of 11 (6 complete) | HW Score: 45 45%, 5 of 11 pts Question Help * Integrative-Risk and valuaton Gant Enterprises, sock has a required return of 9 8% The company, which plans pay a dividend of s$2.43 per share in the coming year, anticipates that its future dividends will increase at an annual rate consistent with that experienced over 2009-2015 period, when the tollowing dividends were paid: a. If the rak-tee rate is 5%, what is the risk premium on Gants stock? b. Using the constant-growh model, estimate the value of Ciants stock. (Hnt Round the computed dividend grovwth rate to the nearest whole percent) c. Explain what effect if any a decrease in the risk premium would have on the value of Giants stock a. Irtensk-free rate is 5%, tensk premium on Gants stock is% (Round to one decimal place) Enter your answer in the answer box and then click Check Ansver engining Chock 0 Ponat

Explanation / Answer

(a) Risk premium = Expected return on stock - Risk free rate of return = 9.8% - 5% 4.8% (b) Value of stock using Constant growth model = D1 / (expected return - growth) = $2.43 ( 9.8% - 5.94%) 62.953 Growth rate = ( Dividend of current year / Dividend of previous year) -1 Year 2010 = (1.71 / 1.62) - 1 5.56% Year 2011 = (1.82 / 1.71) - 1 6.43% Year 2012 = (1.92 / 1.82) -1 5.49% Year 2013 = (2.04 / 1.92) - 1 6.25% Year 2014 = (2.16 / 2.04) - 1 5.88% Year 2014 = (2.29 / 2.16) - 1 6.02% Average of these 6 annual growth rates = (5.56 + 6.43 + 5.49 + 6.25 + 5.88 + 6.02) / 6 5.94 (c) Decrease in risk premium will decrease the expected return of stock. Value of stock and Expected return is inversely related i.e Less the return more will be the value of stock. Hence, decrease in risk premium will increase the value of stock.

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