the final answer will be $43.76/share A business executive is offered a manageme

Question

the final answer will be $43.76/share

A business executive is offered a management job at Generous Electrical Company. They offer to give him a five-year contract which calls for a salary of $62,000 per year, plus 600 shares of their stock at the end of the five years. The executive is currently employed by Fearless Bus Company and they, too, offered him a five-year contract. It calls for a salary of $65,000, plus 100 shares of Fearless Stock each year. The stock is currently worth $60 per share and pays an annual dividend of $2 per share. Assume end-of-year payments of salary and stock. Stock dividends begin one year after the stock is received. The executive believes that the value of stock and the dividend will remain constant. If the executive considers 9% a suitable rate of return in this situation, what must the Generous Electric stock be worth per share to make the two offers equally attractive?

Explanation / Answer

Fearless Bus company Offer Year 1 Year 2 Year 3 Year 4 Year 5 Salary               65,000            65,000          65,000          65,000              65,000 Stock qty                     100                  100                100                100                    100 Cumulative value of shares at yr 5 end              30,000 Dividend received @$2                  200                400                600                    800 Total Cash receipt               65,000            65,200          65,400          65,600              95,800 PV factor @9%                 0.917               0.842             0.772            0.708                0.650 PV of cash flows               59,633            54,878          50,501          46,473              62,263 PV of the offer            273,747 Generous Electric Company Offer Year 1 Year 2 Year 3 Year 4 Year 5 Salary               62,000            62,000          62,000          62,000              62,000 PV factor @9%                 0.917               0.842             0.772            0.708                0.650 PV of cash flows               56,881            52,184          47,875          43,922              40,296 PV of the offer without stock            241,158 Difference with Fearless offer               32,589 Stock qty offered                     600 Required PV of the stocks $             54.32 Required Future value at 5 year end= $             83.57 So the share price at 5 year required to be worth $83.57 per share to make the two offers equally attractive.

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