Question

Shares in Brothers Grimm, Inc., manufacturers of gingerbread houses, are expected to pay a dividend of $8.00 in one year and to sell for $94 per share at that time. How much should you be willing to pay today per share of Grimm under the following circumstances?

Instructions: Enter all responses rounded to two decimal places.

a. Consider a safe rate of interest of 5.6 percent and assume that investing in Grimm carries no risk.

Grimm's share value would be $___.



b. Consider a safe rate of interest of 10.6 percent and assume that investing in Grimm carries no risk.

Grimm's share value would be $___.



c. Consider a safe rate of interest of 5.6 percent, but your risk premium is 2 percent.

The share value today would be $___.
.


Now assume that Grimm is not expected to pay a dividend, but the expected price is unchanged.

Instructions: Enter all responses rounded to two decimal places.

d. Consider a safe rate of interest of 5.6 percent and assume that investing in Grimm carries no risk.

Grimm's share value would be $___.


e. Consider a safe rate of interest of 10.6 percent and assume that investing in Grimm carries no risk.

Grimm's share value would be $____ .


f. Consider a safe rate of interest of 5.6 percent and a risk premium of 2 percent.
   
Grimm's share value would be $_____ .

Answer 1

Answer :-

(A) Grimm's share value = (dividend+selling price) / (1+intrest rate)

= $8+$94 / 1+5.6%

= $102/ 1.056

= $96.59

so Grimm's share value is $96.59

(B) Grimm's share value = ($8+$94) / (1+10.6%)

= $102 / 1.106

= $92.22

so Grimm's share value is $92.22

(C) Grimm's share value = (dividend+selling price) / (1+intrest rate+risk premium)

= $8+$94 / 1+7.6%

= $102 / 1.076

= $94.80

so Grimm's share Value is $94.80

(D) share value = price / (1+intrest rate)

= $94 / 1+5.6%

= $94 / 1.056

= $89.02

so Grimm's share value is $89.02

(E) share value = $94/ 1+10.6%

= $94 / 1.106

= $84.99

so Grimm's share value is $84.99

(F) share value = $94 / (1+7.6%)

= $94 / 1.076

= $87.36

so Grimm's share value is $87.36