What is the present value of 100 shares of stock that will pay an annual dividen

Question

What is the present value of 100 shares of stock that will pay an annual dividend of $5 per share and will be sold in 8 years for $80 per share? Assume that the investor receives the last dividend on the same day that the stock is sold. Also assume that the investor’s required rate of return on this investment is 8.25%. Round your answer to the nearest cent.

2/. Assume that on 1/1/12 you purchased an investment for $3000. The investment pays you $200 on 12/31 of every year that you hold the security. On 1/1/17 you sell the investment for $3500. What is your rate of return? Round your answer to the nearest tenth of a percent (e.g. 33.3%).

3/. Assume that on 1/1/11, the Dow Jones Industrial Average was 11,800. Also assume that on 12/31/11, the Dow is at 12,800. What is the growth rate on the Dow in 2011? If this growth rate continues through 2012, what will be the Dow on 12/31/12? Round your percentage to the nearest tenth of a percent and the new Dow to the nearest integer.

Explanation / Answer

Answer:

1. Presnt Value = Sum of (Annual Dividend x PVAF@8.25% for 8 years + Sale Value x PVF@8.25% for year 8)

Present Value = $ 5 x 100 shares x 5.693 + $ 80 x 100 shares x 0.530 = $ 2,846.50 + $ 4,240 = $ 7,086.50

2. Purchase price of Investment = $ 3,000

Annual earning from Investment = $ 200 per year for 5 years

Sale Value of Investment = $ 3,500

therefore, Rate of Return on Investment = {$ 200 x 5 + ($ 3,500 - $ 3,000)} / $ 3,000 = ($ 1000 + $ 500) / $ 3,000 = 50% (time vale of money is ignored)

3. Growth Rate of Dow in 2011 = ($ 12,800 - $ 11,800) / $ 11,800 = 8.47%

If this growth rate continues through 2012, then Value of Dow on 12/31/12 = $ 12,800 x 1.0847 = $ 13,884.16

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