Financial Theory Final Questions with Answers (100% Correct Answers)

Financial Theory Final Questions with
Answers (100% Correct Answers)
Huang Company's last dividend was $1.25. The dividend growth rate is
expected to be constant at 27.5% for 3 years, after which dividends are expected
to grow at a rate of 6% forever. If the firm's required return (rs) is 11%, what is
its current stock price?— Answer: Year 1 dividend = 1.25 * (1 + 0.275)



= 1.25 * 1.275



= 1.59



Year 2 dividend = 1.59 * 1.275



= 2.03



Year 3 dividend = 2.03 * 1.275



= $2.59



Year 4 dividend = 2.59 * (1 + 0.06)



= 2.59 * 1.06

,2




= 2.75



After that dividend will grow in the form of a growing perpetuity, first we need
to find the PV of the perpetuity,



PV of perpetuity = dividend/(required rate of return - discount rate)



= 2.75/(.11 - 0.06)



= 2.75/0.05



= 55



Now we have all the values of the dividend we need to find the PV of all the
dividend, which will be the current stock price.



Year



Cash inflow



PV factor @ 11%

,3




PV of cash flow



1



1.59



0.901



1.432432432



2



2.03



0.812



1.647593539



3

, 4


2.59



0.731



1.893785678



3



55



0.731



40.21552597



Total



45.19



PV of all the fut

. Sawchuck Consulting has been profitable for the last 5 years, but it has never
paid a dividend. Management has indicated that it plans to pay a $0.25
dividend 3 years from today, then to increase it at a relatively rapid rate for 2