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2 years ago

11

Avocado Incorporated just paid a dividend of $3. An analyst expects this dividend to grow at a rate of 12% for the next 3 years.

After this initial growth stage, the firm is expected to grow at a rate of 5% forever. The required return on this stock is 8%. Given the analyst’s projections, what is the most you should pay for this stock? Round to the nearest cent. Do not include the dollar sign in your answer. (i.e. If your answer were $1.23, then type 1.23 without a $ sign)

1 answer:

yuradex [85]2 years ago

4 0

Answer:

The most you should pay for this stock is 126.89

Explanation:

The dividend in years 1 – 3 will grow at 12% and then at 5% forever.

We had to get the PV for the dividends in years 1-3 (year 3 also includes the estimated future value of the stock).

We used our calculators to find the PV of each year at the 8% discount rate. Finally we will add them all together to get the final answer.

We find the future dividends using g =12%

Dividend in year 0 --->

Dividend in year 1 ---> 3.36

Dividend in year 2 ---> 3.76

Dividend in year 3 ---> 4.21

Dividend in year 4 ---> 4.43

Now we will calculate the present value of the future dividends using r = 8%

Stock Value assuming constant growth rate = 147.52 --(a)

PV in year 1 ---> 3.11

PV in year 2 ---> 3.23

PV in year 3 ---> 120.45 --(discounting (a))

= 120.45 + 3.23 + 3.11

= 126.89

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Jorgansen Lighting, Inc., manufactures heavy-duty street lighting systems for municipalities. The company uses variable costing

bogdanovich [222]

Answer:

a.Year 1 = $277,440, Year 2 = $280,280, Year 3 = $272,560

b.i. Inventory Increased in year 4

b.ii $12,500 deferred in inventory

Explanation:

<u>Absorption Costing Income for Year 1, Year 2, Year 3</u>

<em>Hint: Reconcile the Variable Costing Income to Absorption Costing Income</em>

Year 1 Year 2 Year 3

Variable Costing Income $300,000 $269,000 $250,000

Add Closing Inventory $90,240 $101,520 $124,080

Less Opening Inventory ($112,800) ($90,240) ($101,520)

Absorption Costing Income $277,440 $280,280 $272,560

Here we are adding and subtracting the fixed manufacturing overhead in closing and opening inventory.

This is because difference in Variable Costing Income and Absorption Costing Income lies within fixed manufacturing costs included in inventory.

Inventory Increased in year 4

Inventory deferred in Inventory = $261,600 - $249,100

= $12,500

4 0

2 years ago

The Two Dollar Store has a cost of equity of 11.9 percent, the YTM on the company's bonds is 6.2 percent, and the tax rate is 40

Bezzdna [24]

Answer: 9.03%.

Explanation:

Given: The Two Dollar Store has a cost of equity of 11.9 percent, the YTM on the company's bonds is 6.2 percent, and the tax rate is 40 percent.

Debt to equity ratio is .54

i.e. $\dfrac{debt}{equity}=\dfrac{0.54}{1}\ ...(i)$

Adding denominator to numerator on both the sides, we get,

$\dfrac{debt+equity}{equity}=\dfrac{1.54}{1}\\\\\Rightarrow\ \dfrac{equity}{debt+equity}=\dfrac{1}{1.54}$

i.e. Weighted equity = $\dfrac{1}{1.54}\ ....(ii)$

From (i)

$\dfrac{equity}{debt}=\dfrac1{0.54}\$

Adding denominator to numerator on both the sides we get,

$\dfrac{equity+debt}{debt}=\dfrac{1+0.54}{0.54}$

$\dfrac{equity+debt}{debt}=\dfrac{1.54}{0.54}$

Thus, weight of debt= $\dfrac{1.54}{0.54}$

Now,

Weighted average cost of capital=(Weight of equity) × (cost of equity)+(Weight of debt)×(Cost of debt)×(1-tax rate)

$\dfrac{1}{1.54}\times (0.119)+\dfrac{0.54}{1.54}\times(0.062)\times(1-0.40)\\\\=0.07727+0.02174(0.60)\\\\=0.07727+0.02174(0.60)\\\\=0.07727+0.013044\\\\=0.090314\approx9.03\%$

Hence, the weighted average cost of capital is 9.03%.

4 0

2 years ago

Which of the following should be kept in mind when deciding between mac and windows computers?

jenyasd209 [6]

Answer:

A and B

Explanation:

When you own a business you must keep in mind that most employees would rather use a windows computer rather than a Mac as they are less likely to have used them in the past. This would decrease productivity. Additionally one would have to pay for a course teaching them to use Apple computers which is unnecessary. Additionally Windows Computers are largely cheaper. These savings can be reinvested into the business

5 0

2 years ago

A subsidy is the opposite of a tax. with a $0.50 tax on ice-cream cones, the government collects $0.50 from buyers for each cone

zzz [600]

The concept of subsidy is very well-explained in this item. From the context, subsidy is the amount that is payed by the government to the buyer every time a purchase is made. Since, the concept of subsidy is very favorable to consumers then, the demand for a certain product would definitely go high.

7 0

2 years ago

$1,000 par value zero-coupon bonds (ignore liquidity premiums).

Crazy boy [7]

10.70% - Option D

<u>Explanation:</u>

One-year interest rate one year from now:

$=(1+.2750)^{\wedge} 2 /(1+16 \%)-1$

$=1.275 * 1.275 / 0.16$

= 1.625625 divide by 0.16

=10.160

Therefore, an approximate answer is 10.70%

Respect Maturity (YTM) – in any case alluded to as recovery or book yield – is the theoretical pace of return or loan cost of a fixed-rate security, for example, a security. The YTM depends on the conviction or understanding that a financial specialist buys the security at the present market cost and holds it until the security has developed (arrived at its full worth), and that all premium and coupon installments are made in a convenient manner.

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2 years ago