Apple Computers just paid a dividend of $3.88. You expect a growth rate of 10% f

Question

Apple Computers just paid a dividend of $3.88. You expect a growth rate of 10% for I years. After that, they are expected to grow at 2%. Your required return to hold this stock is 7%. How much is this stock worth? Moven Bank is offering an account that pays a simple 29%, compounded quarterly: what is the effective annual rate? Tofrandi Naturals just paid a dividend of $2.84. You expect a growth rate of 5% for 3 years. After that, they are expected to grow at 11%. Your required return to hold this stock is 21%. How much is this stock worth? Compute the present value of an ordinary annuity receiving 7 annual payments of $58 at an interest rate of: 6% Thora is considering buying a BMW bond for $674,205. This bond has a maturity value of $757, maturing in 3 years, with comparable interest rates of 12%, and coupon payments of $43. What should she pay? Parker Sled Manufacturing has been paying an annual dividend of $4.98 for the past 5 years, and plans to continue for the next 4 years. After that, they are expected to grow at 4%. Your required return to hold this stock is 18%. What would you be willing to pay for this stock? BAMKB Motorcycles just paid a dividend of $5.27. You expect a growth rate of 21% for 2 years. After that, they are expected to grow at 22%. Your required return to hold this stock is 25%. How much is this stock worth? You received a dividend of $5.63 this morning and are attempting to decide if you should hold onto this stock. You expect this stock to grow at 13% for 9 years. After that, you think they will grow at 18%. Given the level of risk, you need a return ofl9%. How much is this stock worth?

Explanation / Answer

(5)

Starting year 2, dividends grow at 2% perpetually.

Present value (PV) of this perpetual dividend at end of year 1 = $3.88 x 1.10 x 1.02 / (0.07 - 0.02)

= $4.3534 / 0.05

= $87.07

Discounted to time 0, its PV = $87.07 / 1.07 = $81.37 .....(1)

PV of next year's dividend = $3.88 x 1.1 / 1.07 = $4 .....(2)

Value of stock = PV of all future dividends = (1) + (2) = $85.37

(6) Effective annual rate (EAR) = [1 + (r / m)]m - 1 where r: Stated interest rate, m: Frequency of compounding

EAR = [1 + (0.29 / 4)]4 - 1 = [1 + 0.0725]4 - 1 = 1.3231 - 1 = 0.3231, or 32.31%

NOTE: First 2 questions are answered.

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