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Chapter 4: 21BP (page 283)
At a growth (interest) rate of 10 percent annually, how long will it take for a sum to double? To triple? Select the year that is closest to the correct answer
It will take 7 years and 12 years approximately to make a sum double and triple, respectively.
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Your father offers you a choice of \(105,000 in 12 years or \)47,000 today. b. If money is still discounted at 8 percent, but your choice is between \(105,000 in 9 years or \)47,000 today, which should you choose?
Explain how the collections and purchases schedules are related to the borrowing needs of the corporation
You invest a single amount of $10,000 for 5 years at 10 percent. At the end of 5 years you take the proceeds and invest them for 12 years at 15 percent. How much will you have after 17 years?
Question:Justin Cement Company has had the following pattern of earnings per share over the last five years:
Year Earnings per Share
20X1 ................... $5.00
20X2 ................... 5.30
20X3 ................... 5.62
20X4 ................... 5.96
20X5 ................... 6.32
The earnings per share have grown at a constant rate (on a rounded basis) and will continue to do so in the future. Dividends represent 40 percent of earnings.
Project earnings and dividends for the next year (20X6).
If the required rate of return (Ke) is 13 percent, what is the anticipated stock price (P0) at the beginning of 20X6?
Question:Beasley Ball Bearings paid a \(4 dividend last year. The dividend is expected to grow at a constant rate of 2 percent over the next four years. The required rate of return is 15 percent (this will also serve as the discount rate in this problem). Round all values to three places to the right of the decimal point where appropriate.
a. Compute the anticipated value of the dividends for the next four years. That is, compute D1, D2, D3, and D4; for example, D1 is \)4.08 (\(4 3 1.02).
b. Discount each of these dividends back to present at a discount rate of 15 percent and then sum them.
c. Compute the price of the stock at the end of the fourth year (P4). P4 5 D5 ______ Ke 2 g (D5 is equal to D4 times 1.02.)
d. After you have computed P4, discount it back to the present at a discount rate of 15 percent for four years.
e. Add together the answers in part b and part d to get P0, the current value of the stock. This answer represents the present value of the four periods ofdividends, plus the present value of the price of the stock after four periods (which in turn represents the value of all future dividends).
f. Use Formula 10-8 to show that it will provide approximately the same answer as part e. P0 5 D1 ______ Ke 2 g For Formula 10-8, use D1 5 \)4.08, Ke 5 15 percent, and g 5 2 percent. (The slight difference between the answers to part e and part f is due to rounding.)
g. If current EPS were equal to $4.98 and the P/E ratio is 1.2 times higher than the industry average of 6, what would the stock price be?
h. By what dollar amount is the stock price in part g different from the stock price in part f?
i. In regard to the stock price in part f, indicate which direction it would move if (1) D1 increases, (2) Ke increases, and (3) g increases
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