Question

On Jan. 1, Year 1, you are considering purchase of Necco Co.’s common stock. Based on...

On Jan. 1, Year 1, you are considering purchase of Necco Co.’s common stock. Based on your analysis, you have determined that:

Book value at Jan. 1, Year 1 is $60 per share

Forecasted Net Income per share for Years 1 through 5 is $12, $15, $25, $50 and $60, respectively

For Year 6 and thereafter, predicted residual income is $0

The firm does not pay dividends

The cost of capital is 15%

Using the Residual Income model, what would be the value of this stock?

A.

$97.18

B.

$110.37

C.

$100.91

D.

$113.36

E.

$86.31

Homework Answers

Answer #1

EXCEL FORMULA:

Know the answer?
Your Answer:

Post as a guest

Your Name:

What's your source?

Earn Coins

Coins can be redeemed for fabulous gifts.

Not the answer you're looking for?
Ask your own homework help question
Similar Questions
Equity Method for Stock Investment with Loss On January 6, Year 1, Bulldog Co. purchased 28%...
Equity Method for Stock Investment with Loss On January 6, Year 1, Bulldog Co. purchased 28% of the outstanding stock of Gator Co. for $172,000. Gator Co. paid total dividends of $20,600 to all shareholders on June 30. Gator Co. had a net loss of $32,700 Year 1. a. Journalize Bulldog's purchase of the stock, receipt of the dividends, and the adjusting entry for the equity loss in Gator Co. stock. Jan. 6 - Purchase June 30 - Dividend Dec....
Treasury stock transactions On Jan 1, 2019, Metco Inc, reported 411,050 shares of $5 par value...
Treasury stock transactions On Jan 1, 2019, Metco Inc, reported 411,050 shares of $5 par value common stock as being issued and outstanding. On Mar 24, 2019, Metco Inc, purchased for its treasury 3,600 shares of its common stock at a price of $37 per share. On Aug 19, 2019, 1, 450 of these treasury shares were sold for $43 per share. Metco's directors declared cash dividends of $1.50 per share during the second quarter and again during the fourth...
You are considering investing $860 in Higgs B. Technology Inc. You can buy common stock at...
You are considering investing $860 in Higgs B. Technology Inc. You can buy common stock at $26.06 per share; this stock pays no dividends. You can also buy a convertible bond ($1,000 par value) that is currently trading at $860 and has a conversion ratio of 28. It pays $51 per year in interest. If you expect the price of the stock to rise to $38.78per share in 1 year, which instrument should you purchase? 1) The holding period return...
(Common stock valuation) Redford, Inc.’s outstanding common stock is currently selling in the market for $33....
(Common stock valuation) Redford, Inc.’s outstanding common stock is currently selling in the market for $33. Dividends of $2.30 per share were paid last year, return on equity is 20 percent, and its retention rate is 25 percent. 1. What is the value of the stock to you, given a 15 percent required rate of return? 2. Should you purchase this stock?​
Common stock valuelong dash—Variabl growth Newman Manufacturing is considering a cash purchase of the stock of...
Common stock valuelong dash—Variabl growth Newman Manufacturing is considering a cash purchase of the stock of Grips Tool. During the year just​ completed, Grips earned ​$4.29 per share and paid cash dividends of ​$2.59 per share ​(D0=$ 2.59​). Grips' earnings and dividends are expected to grow at 20​% per year for the next 3​ years, after which they are expected to grow 6​% per year to infinity. What is the maximum price per share that Newman should pay for Grips...
On January 1, 2017, Culver Corporation had these stockholders’ equity accounts. Common Stock ($10 par value,...
On January 1, 2017, Culver Corporation had these stockholders’ equity accounts. Common Stock ($10 par value, 81,500 shares issued and outstanding) $815,000 Paid-in Capital in Excess of Par Value 483,000 Retained Earnings 620,000 During the year, the following transactions occurred. Jan. 15 Declared a $0.70 cash dividend per share to stockholders of record on January 31, payable February 15. Feb. 15 Paid the dividend declared in January. Apr. 15 Declared a 10% stock dividend to stockholders of record on April...
On 1/1/2017 Starr Co. acquired 60% of the common stock of Best Inc. for $1,200,000. The...
On 1/1/2017 Starr Co. acquired 60% of the common stock of Best Inc. for $1,200,000. The fair value of Best's net assets at that time was $1,800,000, and these net assets had a book value of $1,500,000. The non-controlling interest shares of Best Inc. are not actively traded and the best basis to determine fair value of the non controlling interest would be Starr Co.’s purchase. For the year 2017, Best Inc. earned $250,000 net income and paid dividends of...
Crane Company is considering these two alternatives for financing the purchase of a fleet of airplanes....
Crane Company is considering these two alternatives for financing the purchase of a fleet of airplanes. 1. Issue 51,500 shares of common stock at $ 49 per share. (Cash dividends have not been paid nor is the payment of any contemplated.) 2. Issue 14%, 15-year bonds at face value for $ 2,523,500. It is estimated that the company will earn $ 802,000 before interest and taxes as a result of this purchase. The company has an estimated tax rate of...
XYZ Manufacturing is considering a cash purchase of the stock of PNQ Corp. During the year...
XYZ Manufacturing is considering a cash purchase of the stock of PNQ Corp. During the year just completed, PNQ earned $3.50 per share and paid cash dividends of $2.40 per share. PNQ’s earnings and dividends are expected to grow at 15% per year for the next four years, after which they are expected to grow at 5% per year to infinity. Assume that PNQ has a required return of 10% on investments with risk characteristics similar to those of PNQ....
XYZ Manufacturing is considering a cash purchase of the stock of PNQ Corp. During the year...
XYZ Manufacturing is considering a cash purchase of the stock of PNQ Corp. During the year just completed, PNQ earned $3.50 per share and paid cash dividends of $2.40 per share. PNQ’s earnings and dividends are expected to grow at 15% per year for the next four years, after which they are expected to grow at 5% per year to infinity. Assume that PNQ has a required return of 10% on investments with risk characteristics similar to those of PNQ....