principle of finance

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Business Finance

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6. Determine the present values if $5,000 is received in the future (i.e., at the end of each indicated time period) in each of the following situations: a. 5 percent for ten years $5,000(.614) = $3,070 b. 7 percent for seven years $5,000(.623) = $3,115 c. 9 percent for four years $5,000(.708) = $3,540 22. The Fridge-Air Company’s preferred stock pays a dividend of $4.50 per share annually. If the required rate of return on comparable quality preferred stocks is 14 percent, calculate the value of Fridge-Air’s preferred stock. Price = Dp/r = $4.50/.14 = $? 23. The Joseph Company has a stock issue that pays a fixed dividend of $3.00 per share annually. Investors believe the nominal risk-free rate is 4 percent and that this stock should have a risk premium of 6 percent. What should be the value of this stock? Regarding of whether students consider this to be preferred or common stock, the fact that the dividend growth rate is zero results in the same answer. The required return is the risk-free rate plus the risk premium: 4% + 6% = 10% so the value of the stock will be $3 / 0.10 = $30.00. 24. The Lo Company earned $2.60 per share and paid a dividend of $1.30 per share in the year just ended. Earnings and dividends per share are expected to grow at a rate of 5 percent per year in the future. Determine the value of the stock: a. if the required rate of return is 12 percent. P = D1/(r – g) = $1.30(1.05)/(.12 – .05) = $? b. if the required rate of return is 15 percent. P = $1.30(1.05)/(.15 – .05) = $? c. given your answers to Parts a and b, how are stock prices affected by changes in investor’s required rates of return? Higher required rates of return lead to lower prices.
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