question 1) A firms earnings and dividends are expected to grow at a constant ra

Question

question 1) A firms earnings and dividends are expected to grow at a constant rate indefinitely, and it is expected to pay a dividend of $9.20 per share next year. Expected EPS and BVPS next year are $10.50 and $30 respectively. The cost of equity is 12% and there are 10,000 shares outstanding. Calculate the firms value assuming that the retention ratio stays the same and the market value of debt is $500,000.

Question 2)
A laptop computer on a monthly purchase plan. the computer sold for 1495 she paid 5% down and $64 a month for 24 months

A) what finance charge was paid ?
B)what is the APR to the nearest half percent

Explanation / Answer

Ans 1)

$500k debt works out to $50 per share
With the book value per share at $30, the total assets are $80. This is the amount of money required to generate $10.50 in earnings.

With $9.20 paid out, the firm retains $10.50-$9.20 = $1.30 per share for growth. The first sentence of your problem states that this net earnings are reinvested at the same rate or profitability as the rest of the earnings, or 10.50/80 = 13.12%. Since the cost of equity is 12%, reinvestment of earnings offers an additional 1.12% above the cost of capital.

Now Its very easy to solve i guess ,please ask me any doubt if you have

ANS 2) 1495 + interest = the answer to 'A'

To find the interest:
1495 x .05 = 74.75 <---That is the down payment

Now subtract the down payment from 1495.

1495 - 74.75 = 1420.25 <---This is the amount that you still owe after paying the down payment.

Next: 64 x 24 = 1536 <---This is the amount you will end up paying after 2 years (24 months) and this includes interest, so take this number and subtract the amount that you still owe to find out the interest.

1536 - 1420.25 = 115.75 <---This is how much you paid for interest

So,

A) interest + selling price = finance charge

1495 + 115.75 = 1610.75

A) $1,610.75


Now, to find the APR (Annual Percentage Rate), take the interest amount and divide it by the selling price. So:

115.75/1495 = .0774 etc. or 8% (to the nearest half percent).

So,

B) 8%

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