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Chapter 4: Q8BP-b (page 282)
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?
The choice of $105,000 in 9 years should be preferred over$47,000 today
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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
How is the supernormal growth pattern likely to vary from the normal, constant growth pattern?
Why is a change in required yield for preferred stock likely to have a greater impact on price than a change in required yield for bonds?
You invest $3,000 for three years at 12 percent. b. What is the value of your investment after two years?
What two components make up the required rate of return on common stock?
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