Answer:
(a) $100.00
(b) $95.45
(c) $97.22
(di) $95.24
(dii) $90.91
(diii) $92.59
Explanation:
Brothers Grimm corporation is responsible for the manufacturing of gingerbread houses. During a one year period, they are expected to pay a dividend of $5 and to sell each shares for $100. The share value for different safe interests is calculated as follows
a) If the safe interest is 5%, then the share value for today is
= ( 5+100)/( 1+5/100)
= 105/ ( 1+0.05)
= 105/1.05
= $100.00
b) If the safe interest is 10%, the share value for today would be
= (5+100)/(1+10/100)
= 105/( 1+0.1)
= 105/1.1
= 95.454
= $95.45( to 2 decimal places)
c) If the safe interest is 5% and the risk premium is 3%, then the share value for today is
= (5+100)/(1+(5+3)/100)
= 105/( 1+8/100)
= 105/(1+0.08)
= 105/1.08
= $97.222
= $97.22 (to 2 decimal places)
d) Since Grimm is not expected to pay dividend, the share values for each safe interest can be calculated as follows:
i) If the safe interest is 5% and there is no payment of dividend, then the share value for today is
= 100/( 1+5/100)
= 100/( 1+0.05)
= 100/1.05
= $95.238
= $95.24 ( to 2 decimal places)
ii) If the safe interest is 10% and there is no payment of dividend, then the share value for today is
= 100/( 1+10/100)
= 100/( 1+ 0.1)
= 100/1.1
= $90.909
= $90.91 ( to 2 decimal places)
iii) If the safe interest is 5% and the risk premium is 3% with no payment of dividend, the share value for today is calculated as
= 100/(1+8/100)
= 100/(1+0.08)
= 100/1.08
= $92.592
= $92.59 ( to 2 decimal places)
