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Sock Value, Time Value of Money

1. Common stock value-zero growth - The company's class A stock has paid a dividened of $5.00 per share for the last 15 years. Management expects to continue to pay at that rate for the forseeable future . Sally Talbout purchased 100 shares of common stock 10 years ago at a time when the required rate of return for the stock was 16%. She wants to sell her shares today. The current required rate of returnfor the stock is 12%. How much capital or loss will she have on her shares.

2. Common stock value-constant growth. McCracken company common stock paid a dividend of $1.20 per share last year. The company expects earnings and dividends to grow at a rate of 5% per year for the forseeable future.

a. What required rate of return for this stock would result in a price per share of $28?

b. If McCracken had both earnings and growth and dividened at a rate of 10% what required rate of return would result in a price per share of 28?

3. Time Value - Your rich uncle offers you a choice of one of the three following alternatives. Assume that all present day investments can obtain a return or 8% compounded semi-annually.
a. $200,000 now or
b. $10,000 a year for 30 years
c. $150,000 at the end of 10 years and another $150, 000 at the end of 20 years

Solution Preview

1. Common stock value-zero growth - The company's class A stock has paid a dividened of $5.00 per share for the last 15 years. Management expects to continue to pay at that rate for the forseeable future . Sally Talbout purchased 100 shares of common stock 10 years ago at a time when the required rate of return for the stock was 16%. She wants to sell her shares today. The current required rate of returnfor the stock is 12%. How much capital or loss will she have on her shares.

Current price when rate of return= 12%
Po= Div1/ (r-g)

Dividend for next year= Div1 = 5
Cost of equity= r= 12%
growth rate of dividends/earnings= g= 0%
Current stock price= Po= ? To be determined
Plugging in the values:
Po= $41.67

Price 10 years back when when rate of return was= 16%
Po= Div1/ (r-g)

Dividend for next year= Div1 = 5
Cost of equity= r= 16%
growth rate of dividends/earnings= g= 0% ...

Solution Summary

Calculates stock price for zero growth and constant growth and present value of alternative investments.

$2.19