Financial Theory Final ACTUAL
QUESTIONS AND 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? - CORRECT
ANSWERS✅✅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
= 2.75
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%
PV of cash flow
1
1.59
0.901
1.432432432
2
2.03
0.812
1.647593539
,3
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 years, and then to increase it at a constant
rate of 8.00% thereafter. Management's forecast of the future dividend stream, along with the
forecasted growth rates, is shown below. Assuming a required return of 11.00%, what is your
estimate of the stock's current value? - CORRECT ANSWERS✅✅problem 1
workbook
, ?????
ABC Company sotkc has a required return of 12%, and the stock sells for $40 per share. The
firm just paid a dividend of $1.00, and the dividend is expected to grow by 30% per year for
the next 4 years, so D4 = $1.00*(1.30*1.30*1.30*1.30). After "t=4", the dividend is expected
to grow at a constant rate "X%" per year forever. What is the stock's expected constant
growth rate after "t=4, i.e., what is X?" - CORRECT ANSWERS✅✅D0 = 1
D1 = 1*(1+.30) = 1.30
D2 = 1.30*(1+.30) = 1.69
D3 = 1.69*(1+.30) = 2.197
D4 = 2.197*(1+.30) = 2.8561
PO (Current Selling Price) = 1.30/(1+.12)^1 + 1.69/(1+.12)^2 + 2.197/(1+.12)^3 +
2.8561/(1+.12)^4 + 2.8561*(1+g)/(.12 - g)*(1+.12)^4
40 = 5.887 + 2.8561*(1+g)/(.12 - g)*(1+.12)^4
40 = 5.887 + 1.815*(1+g)/(.12 - g)
34.113*(.12 - g) = 1.815 + 1.815g
QUESTIONS AND 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? - CORRECT
ANSWERS✅✅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
= 2.75
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%
PV of cash flow
1
1.59
0.901
1.432432432
2
2.03
0.812
1.647593539
,3
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 years, and then to increase it at a constant
rate of 8.00% thereafter. Management's forecast of the future dividend stream, along with the
forecasted growth rates, is shown below. Assuming a required return of 11.00%, what is your
estimate of the stock's current value? - CORRECT ANSWERS✅✅problem 1
workbook
, ?????
ABC Company sotkc has a required return of 12%, and the stock sells for $40 per share. The
firm just paid a dividend of $1.00, and the dividend is expected to grow by 30% per year for
the next 4 years, so D4 = $1.00*(1.30*1.30*1.30*1.30). After "t=4", the dividend is expected
to grow at a constant rate "X%" per year forever. What is the stock's expected constant
growth rate after "t=4, i.e., what is X?" - CORRECT ANSWERS✅✅D0 = 1
D1 = 1*(1+.30) = 1.30
D2 = 1.30*(1+.30) = 1.69
D3 = 1.69*(1+.30) = 2.197
D4 = 2.197*(1+.30) = 2.8561
PO (Current Selling Price) = 1.30/(1+.12)^1 + 1.69/(1+.12)^2 + 2.197/(1+.12)^3 +
2.8561/(1+.12)^4 + 2.8561*(1+g)/(.12 - g)*(1+.12)^4
40 = 5.887 + 2.8561*(1+g)/(.12 - g)*(1+.12)^4
40 = 5.887 + 1.815*(1+g)/(.12 - g)
34.113*(.12 - g) = 1.815 + 1.815g
