Question

Far Side Corporation is expected to pay the following dividends over the next four years: $14, $11, $8, and $5. Afterward, the company pledges to maintain a constant 5 percent growth rate in dividends forever. If the required return on the stock is 13 percent, what is the current share price? (Do not round your intermediate calculations.)

options:

	$69.86
	$66.37
	$67.30
	$71.96
	$75.23

Metallica Bearings, Inc., is a young start-up company. No dividends will be paid on the stock over the next 8 years because the firm needs to plow back its earnings to fuel growth. The company will pay a $7 per share dividend in 9 years and will increase the dividend by 7 percent per year thereafter. If the required return on this stock is 13 percent, what is the current share price? (Do not round your intermediate calculations.)

options:

	$43.89
	$45.20
	$46.08
	$41.69
	$38.84

Answer 1

Part A:

Price = PV of CFs from it.

D5 = D4( 1+g)

= $ 5 ( 1 + 0.05 )

= $ 5 * 1.05

= $ 5.25

P4 = D5 / [ Ke - g ]

= 5.25 / [ 13% - 5% ]

= 5.25 / 8%

= $ 65.63

Price calculation:

Year	particulars	CF	PVf @13%	Disc CF
1	D1	$   14.00	0.8850	$   12.39
2	D2	$   11.00	0.7831	$      8.61
3	D3	$      8.00	0.6931	$      5.54
4	D4	$      5.00	0.6133	$      3.07
4	P4	$   65.63	0.6133	$   40.25
Price of Stock	$   69.87

Option A is correct.

Part B:Price = PV of CFs from it.

P8= D9 / [ Ke - g ]

= $ 7 / [ 13% - 7% ]

= $ 7 / 6%

= 116.67

P0 = P8 * PVF(r%, n)

= $ 116.67 * PVF(13%, 8)

= $ 116.67 * 0.3762

= $ 43.89

Option A is correct