Question

1. What is the value of a dividend stock that pays a $3 dividend in yr 1, a $3 dividend in yr 2, a $3.25 dividend in yr 3, then growing at 1% thereafter. TheWACC is 7% and the cost of equity is 9%

A    47

b    35

c     49

d    37

2. I want to pull some cash out of my house by refinancing but I don’t want my pmt to increase. My initial mortgage was 200k and now the balance is 175k on my 4.25% rate with a pmt of $984 per month. I can get a new 30 year mortgage at 3%. How much cash can I pull out without increasing my pmt?

A 0k

B 33k

C. 58k

D. need more info

Answer 1

First:

Year	Particulars	Cash flow	× discount rate	Present value
1	Dividend	3.00	0.93023	$            2.79
2	Dividend	3.00	0.86533	$            2.60
3	Dividend	3.25	0.80496	$            2.62
3	Share price	50.50	0.80496	$          40.65
Stock price today			$          48.65

Answer is $49

Second:

a	Present value of annuity=	P* [ [1- (1+r)-n ]/r ]
P=	Periodic payment	984.00
r=	Rate of interest per period
	Annual interest	3.00%
	Number of payments per year	12
	Interest rate per period	0.03/12=
	Interest rate per period	0.250%
n=	number of periods:
	Number of years	30
	Periods per year	12
	number of payments	360
	Present value of annuity=	984* [ (1- (1+0.0025)^-360)/0.0025 ]
	Present value of annuity=	233,394.35
	Less: loan balance	-175,000.00
	Pull out	58,394.35

Answer is $58k

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