Question

46. A financial analyst has been following Davis Inc., a new high-tech firm. He estimates that the current risk-free rate (r_F) is 6.25%, the market risk premium (r_M - r_F) is 5%, and the firm’s beta is 1.75. The current dividend just paid (D₀) is $1.00. The analyst estimates that the company’s dividend will grow at a rate of 25% this year, 20% next year, and 15% the following year. After three years the dividend is expected to grow at a constant rate of 7% a year. The analyst believes that the stock is fairly priced. What’s the horizon value (terminal value) of the stock at the end of year 3 for the constant growth period?

		$23.07
		$23.83
		$25.42
		$26.85

Using the information from Question 46, calculate the current price of the stock.

		$15.62
		$17.21
		$18.53
		$19.83

48. The original sale price of a car is $22,194.96. The required down payment is $1,410. What is the monthly payment if the customer can apply for a 3-year auto loan with a promotional financing rate at 2.99%?

		$577.36
		$598.25
		$604.36
		$645.36

49. Based on the information from Q48, if a customer decides to skip the 2.99% financing promotion loan but take the cash rebate offer, how much cash does the customer need to pay to buy the new car? We assume that regular market interest rate for auto loan is 6%.

		$19,264.02
		$19,865.92
		$21,213.64
		$21,275.92

Based on the information from Q48 and Q49, what’s the amount of cash rebate can the customer receive from the dealer if he decides to pay for the car with all cash instead of applying for the auto loan with the 2.99% low interest rate?

		$1,521
		$2,329
		$919
		$3,930

Answer 1

46.Required Rate =Risk Free Rate + Beta*(RM-Rf) =6.25%+1.75*5%=15%

Dividend Year 1 =D0*(1+g1) =1*(1+25%)
Dividend Year 2 =D1*1+g2) =1*(1+25%)*(1+20%)
Dividend Year 3 =D2*(1+g3) =1*(1+25%)*(1+20%)*(1+15%)
Dividend Year 4 =D0*(1+g4) =1*(1+25%)*(1+20%)*(1+15%)*(1+7%)
Terminal Value =Dividend Year 4/(Required Rate-g) =1*(1+25%)*(1+20%)*(1+15%)*(1+7%)/(15%-7%) =23.07188 or 23.07

Current Price of the stock =D1/(1+r)+D2/(1+r)^2+D3/(1+r)^3+Terminal Value/(1+r)^3
=1.25/(1+15%)+1*(1+25%)*(1+20%)/(1+15%)^2++25%)*(1+20%)*(1+15%)/(1+15%)^3+23.07188/(1+15%)^3=18.53
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