The required rate of return on the shares in the companies identified below is 10% pa....

The required rate of return on the shares in the companies identified below is 10% pa. Calculate the current share price (ex-dividend) in each case. (a) The current earnings per share of Alpha Ltd are $3.80. The company does not reinvest any of its earnings. Earnings are expected to remain constant. (b) Gamma Ltd is planning to reinvest earnings and not pay dividends until year 10, when a divide of $8 is expected (D10 = $8). Dividends are expected to grow at 3.25% pa forever after that.

Expert Solution

a)

Price : Dividend /Required return

= 3.80 / .10

=$ 38 per share

b)Terminal value at year 10 :D10(1+g)/(rs-g)

8(1+.0325)/(.10-.0325)

8*1.0325 /.0675

122.37037

Current price = PVF10%,10*CF10

= .38554 *(8+122.37037)

= .38554 * 130.37037

= $ 50.26 per share

*

**find present value factor using the formula :1/(1+i)^n

jeff jeffy answered 1 year ago

The required rate of return on the shares in the companies identified below is 11.60% pa....

The required rate of return on the shares in the companies identified below is 11.60% pa. Calculate the current share price (ex-dividend) in each case. a) The current earnings per share of Alpha Ltd are $4.80. The company does not reinvest any of its earnings. Earnings are expected to remain constant. b) Beta Ltd’s current dividend is $2.80 (D0) and dividends are expected to grow at 5.5% pa indefinitely. c) Gamma Ltd is not expecting to pay dividends for three...

Garage, Inc., has identified the following two mutually exclusive projects. The required rate of return on...

Garage, Inc., has identified the following two mutually exclusive projects. The required rate of return on both projects is 12%. Which project should the company choose and why? Year Cash Flow (A) Cash Flow (B) 0 -$29,000 -$29,000 1 14,400 4,400 2 12,300 9,800 3 9,200 18,500 4 8,100 16,800 A: Choose A because project A has a higher IRR B: Choose B because project B has a higher NPV C: Choose B because project B has shorter payback period...

Assume that the risk-free rate is 2.5% and the required return on the market is 10%....

Assume that the risk-free rate is 2.5% and the required return on the market is 10%. What is the required rate of return on a stock with a beta of 2.1? Round your answer to two decimal places.

BETA AND REQUIRED RATE OF RETURN a. A stock has a required return of 9%; the...

BETA AND REQUIRED RATE OF RETURN a. A stock has a required return of 9%; the risk-free rate is 5%; and the market risk premium is 3%. What is the stock's beta? Round your answer to two decimal places. b. If the market risk premium increased to 10%, what would happen to the stock's required rate of return? Assume that the risk-free rate and the beta remain unchanged. If the stock's beta is equal to 1.0, then the change in...

A firm issues a 10-year, $1,000 par value bond. The required rate of return is 10%....

A firm issues a 10-year, $1,000 par value bond. The required rate of return is 10%. 1. What is the yield to maturity on a 10-year, 9% annual coupon, $1,000 par value bond that sells for $878.00? Another bond that sells for $1,134.20? What does a bond selling at a discount or at a premium tell you about the relationship between rd and the bond’s coupon rate? 2.What are the total return, the current yield, and the capital gains yield...

You are informed that the effective annual required rate of return is 10%. Cash flows for...

You are informed that the effective annual required rate of return is 10%. Cash flows for the projects are indicated in the table below (in thousands of dollars): Year 0 1 2 3 A -1,800 600 1,00 1,200 B 12,000 -600 -10,800 -5,000 For the following problems, show all your work (i.e. express al formulas used with values in place of variables). a) Consider Project A and Project B independent projects. Calculate the internal rate of return (IRR) for Project...

Unilate’s required rate of return is 10%. Assume that you are confident about the estimates of...

Unilate’s required rate of return is 10%. Assume that you are confident about the estimates of all the variables that affect the project’s cash flows except unit sales. If product acceptance is poor, sales would be only 75,000 units a year, whereas a strong consumer response would produce sales of 125,000 units. In either case, cash costs would still amount to 60% of revenues. You believe that there is a 25% chance of poor acceptance, a 25% chance of excellent...

King Company's required rate of return is 10%. The company is considering the purchase of three...

King Company's required rate of return is 10%. The company is considering the purchase of three machines, as indicated below. Consider each machine independently. (Ignore income taxes in this problem.) Machine A will cost $25,000 and will have a useful life of 15 years. Its salvage value will be $1,000 and cost savings are projected at $3,500 per year. Calculate the machine's net present value. How much should King Company be willing to pay for Machine B if the machine...

What is the difference between the expected rate of return and the required rate of return?...

What is the difference between the expected rate of return and the required rate of return? What does it mean if they are different for a particular asset at a particular point in time?

Risk free rate of return is 5% & required rate of return on the market is...

Risk free rate of return is 5% & required rate of return on the market is 9%. What is the security market line? If corporate beta is 1.8 what does that mean?

Question