Question

1.    Valuation of a Stock Through the Gordon Growth Model (8 pts.):  Please use the following information and the Gordon Growth Model of Stock Valuation to calculate the most recent dividend paid by WXZ corporation. (Make sure you convert percentage figures into decimals before using the formula) and please show your work clearly.

Current stock price of a share of WXZ Corporation: $54.25

Expected constant growth rate of dividends: 8.5%

Investor’s required return on investment equity: 12.5%

2.   The Net Asset Value of a Mutual Fund (10 pts.):  Suppose that 12 months ago, an investor purchased a given number of shares of a Mutual fund at the then fund’s Net Asset Value of $4.00. Assume that today (12 months later) this investor sells those shares at today’s NAV and that the yield or rate of return on this individual’s investment is - 4.5%, yes, negative 4.5%.   Suppose, furthermore, that the Fund’s Balance Sheet as of today shows the following information, in no particular order:

Cash…………………………………………………………………………..$24,790

Accrued fees and other liabilities…………………………….. $87,458

Current market value of holdings of stocks……..……$5,749,612

Current market value of holdings of bonds…………. $2,579,536

Please calculate this fund’s NAV today, and the number of this fund’s shares outstanding as of today.  Please show your work clearly.

3.   Hedge Funds (6 pts.):  What key characteristics and regulatory constraints distinguish Hedge Funds from other types of Mutual Funds?

Answer 1

question 1:

As per Gordon Growth Model of Stock Valuation:

P=Do(1+g)/(Re-g)

P= price of share. 54.25
Do= most recent dividend
g= Growth rate 8.5% or 0.085
Re= required rate of return. 0.125

54.25= Do(1.085)/(0.125-0.085)

Do(1.085) = 54.25 x 0.04

Do= $2

The most recent dividend paid by WXZ corporation=$2

Question 2: Refer comment.

Question 3: Just for help, posted it in image format.