Introduction to finance Answer questions AD Question A Alpha

Introduction to finance

Answer questions A-D

Question A

Alphabet Inc. will not pay it\'s first dividend until ten years from now. The first dividend received in 10 years (Year 10) is expected to be $120. Dividends are expected to grow at 4% forever after this first dividend payment. The required rate of return for similar stocks is 15%. What is the current value of Alphabet, Inc. stock?

Question B

Snoke Inc\'s will pay a dividend of $10 next year. The required rate of return is 10% and dividends are expected to grow 5% after next year. What will Snoke\'s dividend be in 100 years? (Year 100)?

Question C

Snoke Inc\'s will pay a dividend of $10 next year. The required rate of return is 10% and dividends are expected to grow 5% after next year. What is Snoke\'s estimated stock price at the end of Year 99? (Hint use Year 100 dividend)

Question D

Snoke Inc\'s will pay a dividend of $10 next year. The required rate of return is 10% and dividends are expected to grow 5% after next year. What is Snoke\'s estimated stock price as of today (Year 0 Estimated Price of Stock)?

Solution

Answer A Value of future dividends at the end of 10th year = Dividend payable in 11th year / [required rate of return - Growth rate] Value of future dividends at the end of 10th year = [$120 * 1.04] / [0.15 - 0.04] Value of future dividends at the end of 10th year = $1134.55 Current value of Alphabet, Inc. stock = Value of future dividends at the end of 10th year * present value factor @ 15% Current value of Alphabet, Inc. stock = $1134.55 * [1/1.15^10] = $280.44 Answer B Value of Snoke\'s dividend be in 100 years = Next Year dividend * (1+growth rate)^no.of years Value of Snoke\'s dividend be in 100 years = $10 * (1+0.05)^100 = $1315.01 Answer C Stock price at the end of 1st Year = Dividend in 2nd Year / [required rate of return - Growth rate] Stock price at the end of 1st Year = [$10 * 1.05] / [0.10 - 0.05] = $210 Snoke\'s estimated stock price at the end of Year 99 = Stock price at the end of 1st Year * [1+(required rate of return - growth rate)]^no.of years Snoke\'s estimated stock price at the end of Year 99 = $210 * [1+(0.10 - 0.05)]^100 Snoke\'s estimated stock price at the end of Year 99 = $27615.26 Answer D Snoke\'s estimated stock price as of today = Present value of next year dividend + Present value of future dividends Present value of next year dividend = Next dividend * present value factor @ 10% Present value of next year dividend = $10 * (1/1.10^1) = $9.09 Present value of future dividends at the end of 2nd year = [Next year dividend * (1+growth rate)] / [required rate of return - Growth rate] Present value of future dividends at the end of 2nd year = [$10 * (1+0.05)] / [0.10 - 0.05] = $210 Present value of future dividend = $210 * (1/1.10^2) = $173.55 Snoke\'s estimated stock price as of today = $9.09 + $173.55 = $182.64