Question

The last dividend payment of a stock was $0.80 and this dividend is expected to grow at 6% per year for three years. After that, the dividend will grow at 3% indefinitely. Using the two-stage dividend growth model, what is the correct formula for B6 if the required rate of return on this stock is 15%?

A | B | |

1 | Last Dividend | $0.80 |

2 | Required Return | 15% |

3 | Growth Rate 1 | 6% |

4 | Growth Rate 2 | 3% |

5 | Growth Rate 1 Time | 3 |

6 | Intrinsic Value | 7.42 |

Group of answer choices

=B1/(B2-B3)*(1+((1+B3)/(1+B2))^B5)+(B1*(1+B3)^B5*(1+B4)/(B2-B4)/(1+B2)^B5)

=B1*(1+B3)/(B2-B3)*(1-((1+B2)/(1+B3))^B5)+(B1*(1+B4)^B5*(1+B3)/(B2-B3)/(1+B2)^B5)

=B1*(1+B3)/B2-B3*1-(1+B3)/(1+B2)^B5+B1*(1+B3)^B5*(1+B4)/(B2-B4)/(1+B2)^B5

=B1*(1+B3)/(B2-B3)*(1-((1+B3)/(1+B2))^B5)+(B1*(1+B3)^B5*(1+B4)/(B2-B4)/(1+B2)^B5)

=B1*(1-B3)/(B2+B3)*(1+((1-B3)/(1-B2))^B5)-(B1*(1-B3)^B5*(1-B4)/(B2+B4)/(1-B2)^B5)

Answer #1

Given that,

Last dividend paid D0 = $0.8

required rate of return r = 15%

growth rate for 3 years g1 = 6%

Thereafter growth rate g2 = 3%

So, using 2-stage dividend growth model, intrinsic value is calculated as

P0 = D0*(1+g1)/(1+r) + D0*((1+g1)^2)/(1+r)^2 + D0*((1+g1)^3)/(1+r)^3 + D0*((1+g1)^3)*(1+g2)/((r-g2)*(1+r)^3)

=> P0 = (D0*(1+g)/(1+r))*(1 - ((1+g)/(1+r))^3) + D0*((1+g1)^3)*(1+g2)/((r-g2)*(1+r)^3)

So, Formula in cell B6 =B1*(1+B3)/(B2-B3)*(1-((1+B3)/(1+B2))^B5)+(B1*(1+B3)^B5*(1+B4)/(B2-B4)/(1+B2)^B5)

Hence option D is correct.

What would be the value of cell B7?
A
B
C
1
Last Dividend
$0.75
2
Required Return
12%
3
Growth Rate 1
8%
4
Growth Rate 2
3%
5
Growth Rate 1 Time
5
6
Transition Period
6
7
Intrinsic Value
=FAME_HModelValue(B1*(1+B3),B2,B3,B4,B5,B6)
Group of answer choices
$12.36
$18.22
$11.92
$22.44
$28.46

Which of the following will calculate the DOL in B8?
A
B
1
Sales
5,000,000
2
Variable Costs
2,000,000
3
Fixed Costs
1,500,000
4
EBIT
1,500,000
5
Unit Sales
100,000
6
Price per Unit
50.00
7
Variable Cost per Unit
20.00
8
Degree of Operating Leverage
?
Group of answer choices
=B5*(B6-B7)/B4
=(B1-B2)/(B1-B2-B3)
All of them
=(B1-B2)/B4
=(B5*B6-B5*B7)/(B5*B6-B5*B7-B3)

What should be the formula in B13?
A
B
1
2017
2
Cash
62,000
3
Accounts Receivable
348,000
4
Inventory
728,000
5
Plant and Equipment
629,000
6
Accumulated Depreciation
149,000
7
Accounts Payable
157,000
8
Notes Payable
263,000
9
Other Current Liabilities
166,000
10
Long-term Debt
423,000
11
Common Stock
414,000
12
Retained Earnings
195,000
13
Current Ratio
?
Group of answer choices
=SUM(B2:B4)/(B7+B9)
=SUM(B2:B4)/SUM(B7:B9)
=(B1+B2)/(B6+B7+B8)
=(B4-B4)/(B6+B7+B8)
=SUM(B2:B5)/(B6+B8+B9)

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