FIN 330 Fall 2018 lnstructori Jiahao Gu 5. (10 points) You plan to invest $1,000
ID: 2819825 • Letter: F
Question
FIN 330 Fall 2018 lnstructori Jiahao Gu 5. (10 points) You plan to invest $1,000 on the last day of every ycar for the nest 8 years. If the interest rate on the investment is 10% what is the value of your investment in 8 years? 6. (10 points) You are valuing the stock price of a public company. The company pays annual dividend. This year the company issues dividend of $0.8 per share. The analysts consider the company grows at a constant rate of 5%. The required return is 8%, what is the intrinsic value of the stock? If the current market price for the stock is $30 per share, would you purchase the stock or not purchase the stock? Page 4 of 5Explanation / Answer
Answer 5;
Investment on last date of each year for 8 years = $1000
Rate of interest = 10%
FV Interest Factors for a One-Dollar Annuity Compounded at 10% for 8 Periods:
FV = [(1 + k)n - 1 ] / k
= [(1+10%)8 -1] / 10%
=11.43589
As such value of investment in 8 years = $1,000 * 11.43589 = $11,435.89 = $11,436 (Rounded off)
Answer 6:
Current year dividend per share = $0.8
Constant Growth rate = g = 5%
Required Return = k = 8%
Dividend next year = D1 = $0.80 * (1+ 5%) = $0.84
Current Intrinsic share value = P0 = D1 / (k - g)
= $0.84 / (8% - 5%)
= $28
Current market price of share is $30. Since the market price is higher than current intrinsic value, the share price is expected to fall. As such I would not purchase.
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