Global Finance - Essay Example

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Q1) Thomas brothers is expected to pay a $0.50 per share dividend at the end of year (i.e.D1 = $0.50). the dividend is expected to grow at a constant rate of 7 percent a year. The required rate of return on the stock Ks, is 15 percent. What is the value per share of the company's stock
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Topic: Global Finance Q1) Thomas brothers is expected to pay a $0.50 per share dividend at the end of year (i.e.D1 = $0.50). the dividend is expected to grow at a constant rate of 7 percent a year. The required rate of return on the stock Ks, is 15 percent. What is the value per share of the company's stock
PV = D0 (1+g)/(ks - g)
PV = $0.50 (1+.07)/(15-.07)
PV = $0.50 (1.07)/(14.93)
PV = $0.50 (.072)
PV = $0.036
The value per share of the company's stock is $0.036
Q2) You are considering an investment in the common stock of Kellers Corp. the stock is expected to pay dividend of $2 a share at the end of the year (D1= $2.00). The stock has a beta equal to 0.9. The risk free rate is 5.6 percent. And the market risk premium is 6 percent. The stock dividend is expected to grow at a constant rate g. the stock currently sells for $25 a share. Assuming the market is in equilibrium. What does the market believe will be the stock price at the end of 3 years ( That is , what is P3)
Expected Return = (Beta x Market Risk Premium) + Risk Free Rate
Expected Return = (.09*.06) + 5.6
Expected Return = (.0054) + 5.6
Expected Return = 5.6054
The stock price at the end of 3 years will be (5.6054 + $25) x 3 = ($30.6054) x 3 = 91.82.
The stock price at the end of 3 years will be $91.82
Q3) Martell Mining Company's ore reserves are being depleted. So its sales are falling. Also, its pit is getting deeper each year, so its costs are rising. As a result, the company's earnings and dividends are declining at the constant rate of 5 percent per year. If D0=$5 and Ks=15%, what is the value of Martell Mining's
PV = D0 (1+g)/(ks - g)
PV = $5.00 (1+.05)/(.15-.05)
PV = $5.00 (1.05)/(.1)
PV = $5.00 (10.5)
PV = $52.50
The value of Martell Mining's is $52.50. Read More
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