Chapter 4: Question: (page 279)
How is the present value of a single sum related to the present value of an annuity?
Answer
The present value of an annuity is obtained by adding up the present value of each sum of money (i.e., payments or receipts) associated with a particular annuity.
Over 30 million students worldwide already upgrade their learning with Vaia!
All the tools & learning materials you need for study success - in one app.
Get started for free
Jack Hammer invests in a stock that will pay dividends of \(2.00 at the end of the first year; \)2.20 at the end of the second year; and \(2.40 at the end of the third year. Also, he believes that at the end of the third year he will be able to sell the stock for \)33. What is the present value of all future benefits if a discount rate of 11 percent is applied? (Round all values to two places to the right of the decimal point.)
Question: C. D. Rom has just given an insurance company \(35,000. In return, he will receive an annuity of \)3,700 for 20 years. At what rate of return must the insurance company invest this $35,000 in order to make the annual payments?
Question:Surgical Supplies Corporation paid a dividend of $1.12 per share over the last 12 months. The dividend is expected to grow at a rate of 2.5 percent over the next three years (supernormal growth). It will then grow at a normal, constant rate of 7 percent for the foreseeable future. The required rate of return is 12 percent (this will also serve as the discount rate).
a. Compute the anticipated value of the dividends for the next three years (D1, D2, and D3).
b. Discount each of these dividends back to the present at a discount rate of 12 percent and then sum them.
c. Compute the price of the stock at the end of the third year (P3).
P3 = D4/ (Ke - g)
d. After you have computed P3, discount it back to the present at a discount rate of 12 percent for three years.
e. Add together the answers in part b and part d to get the current value of the stock. (This answer represents the present value of the first three periods of dividends plus the present value of the price of the stock after three periods.)
Question:How does the cost of a source of capital relate to the valuation concepts presented previously in Chapter 10? (LO11-3)
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
What do you think about this solution?
We value your feedback to improve our textbook solutions.
