Question

A firm has a current dividend D₀ = $1. Analysts expect the firm’s dividend to grow by 20% this year, by 15% in year 2, and a constant rate of 5% in year 3 and thereafter. The required return is 20%. What is the current price of the stock?

$8.67

$9.26

$10.32

$11.04

A firm is planning its operations for next year. Data for use in the forecast are shown below. Based on the EFN equation, what is the required amount?

Last year’s sales S₀ = $350

Sales growth rate g = 30%

Last year’s total assets A₀ = $500

Last year’s profit margin M = 5%

Last year’s accounts payable = $40

Last year’s notes payable to bank = $50

Last year’s accruals = $30

Target payout ratio = 60%

____

$102.80

$108.20

$113.90

$119.90

A firm is planning its operations for next year. Data for use in the forecast are shown below. Use this expression EFN = A*/S₀(?S) – L*/S₀(?S) - mS₁(RR) to determine the required amount of external funds. State the relevant assumption imposed on the analysis.

Last year’s sales S₀ = $350

Sales growth rate g = 30%

Last year’s total assets A₀ = $500

Last year’s profit margin m = 7.5%

Last year’s accounts payable = $40

Last year’s notes payable to bank = $50

Last year’s accruals = $30

Target payout ratio = 55%

Answer 1

	Required Rate of Return=	20%
	D1=1(1.20)=	$       1.20
	D2=1.20*(1.15)=	$       1.38
	D3=1.38*(1.05)=	$       1.45
	Future Price=D3/(R-g)
	1.449/(.20-.05)
	$                                                                                            9.66
	Present Value of stock
	1.20/(1.20)+(1.38+9.66)/(1.20)^2	$       8.67
		Current	Expected Sales
	Sales	$ 350.00	$                455.00
	Total Assets	$ 500.00
	Accounts Payable	$    40.00
	Accrual	$    30.00
	Profit Margin	5%
	Payout Ratio	60%
	L0=($40+$30)	$    70.00
	Retention Ratio=(1-60%)	$       0.40
	?S=($455-$350)	$ 105.00
	AFN= Ao* ?S/So- Lo * ?S/ So - S1 * PM * b
	AFN=(500)*(105/350)-70*(105/350)-455*5%*40%	$ 119.90
	Required Amount	$ 119.90
		Current	Expected Sales
	Sales	$ 350.00	$                455.00
	Total Assets	$ 500.00
	Accounts Payable	$    40.00
	Accrual	$    30.00
	Profit Margin	7.5%
	Payout Ratio	55%
	L0=($40+$30)	$    70.00
	Retention Ratio=(1-.55)	$       0.45
	?S=($455-$350)	$ 105.00
	AFN= Ao* ?S/So- Lo * ?S/ So - S1 * PM * b
	AFN=(500)*(105/350)-70*(105/350)-455*7.5%*45%	$ 113.64
	Required Amount	$ 113.64