A firm has a current dividend D 0 = $1. Analysts expect the firm’s dividend to g

Question

A firm has a current dividend D0 = $1. Analysts expect the firm’s dividend to grow by 20% this year, by 15% in year 2, and a constant rate of 5% in year 3 and thereafter. The required return is 20%. What is the current price of the stock?

$8.67

$9.26

$10.32

$11.04

A firm is planning its operations for next year. Data for use in the forecast are shown below. Based on the EFN equation, what is the required amount?

Last year’s sales S0 = $350

Sales growth rate g = 30%

Last year’s total assets A0 = $500

Last year’s profit margin M = 5%

Last year’s accounts payable = $40

Last year’s notes payable to bank = $50

Last year’s accruals = $30

Target payout ratio = 60%

____

$102.80

$108.20

$113.90

$119.90

A firm is planning its operations for next year. Data for use in the forecast are shown below. Use this expression EFN = A*/S0(?S) – L*/S0(?S) - mS1(RR) to determine the required amount of external funds. State the relevant assumption imposed on the analysis.

Last year’s sales S0 = $350

Sales growth rate g = 30%

Last year’s total assets A0 = $500

Last year’s profit margin m = 7.5%

Last year’s accounts payable = $40

Last year’s notes payable to bank = $50

Last year’s accruals = $30

Target payout ratio = 55%

Explanation / Answer

Required Rate of Return= 20% D1=1(1.20)= $       1.20 D2=1.20*(1.15)= $       1.38 D3=1.38*(1.05)= $       1.45 Future Price=D3/(R-g) 1.449/(.20-.05) $                                                                                            9.66 Present Value of stock 1.20/(1.20)+(1.38+9.66)/(1.20)^2 $       8.67 Current Expected Sales Sales $ 350.00 $                455.00 Total Assets $ 500.00 Accounts Payable $    40.00 Accrual $    30.00 Profit Margin 5% Payout Ratio 60% L0=($40+$30) $    70.00 Retention Ratio=(1-60%) $       0.40 ?S=($455-$350) $ 105.00 AFN= Ao* ?S/So- Lo * ?S/ So - S1 * PM * b AFN=(500)*(105/350)-70*(105/350)-455*5%*40% $ 119.90 Required Amount $ 119.90 Current Expected Sales Sales $ 350.00 $                455.00 Total Assets $ 500.00 Accounts Payable $    40.00 Accrual $    30.00 Profit Margin 7.5% Payout Ratio 55% L0=($40+$30) $    70.00 Retention Ratio=(1-.55) $       0.45 ?S=($455-$350) $ 105.00 AFN= Ao* ?S/So- Lo * ?S/ So - S1 * PM * b AFN=(500)*(105/350)-70*(105/350)-455*7.5%*45% $ 113.64 Required Amount $ 113.64

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