Q6 You w expected 6% for stock A and 50 ant to earn a return of 10% on each of t
ID: 2788240 • Letter: Q
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Q6 You w expected 6% for stock A and 50 ant to earn a return of 10% on each of two stocks, A and B. Each of the stocks is to pay a dividend of $4 in the upcoming year. The expected growth rate of dividends is for stockB Usingthe constant growth DDM the intrinsic value or st % ock Q7 Gagliardi Way Corporation has an expected ROE of 15%. If it pays out 30% of its earnings as dividends, its dividend growth rate (or sustainable growth rate) will be An investor buys a stock at $ 32 a share and deposits 50% initial margin. Assume that the maintenance margin is 25%, the stock pays no dividends, and the transaction costs and interest on the margin loan are zero. The price at which the investor would receive a margin call isExplanation / Answer
6.
According to dividend-discount model,
P0 = D1/(R-G)
P0 = Current stock price
D1 - Dividend at t =1 = 4
R - Required rate = 10%
G - Growth rate = 6%
Intrinsic value of stock A = 4/(0.1-0.06) = $100
7.
Sustainable growth rate = Retention rate*ROE
Retention rate = 1-dividend payout = 1-0.3 = 0.7
Sustainable growth rate = 0.7*15% = 0.1050 = 10.50%
8.
Maintenance margin is the minimum required level of margin to total securities value
Inital margin = 32*0.5 = 16
Let the stock rate be x, at which you receive margin call
Maintenance margin = (x-16)/x = 0.25
x = 21.33
When the price falls to $21.33 investor will receive a margin call.
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