A firm has a current dividend D0 1 Analysts expect the firm

A firm has a current dividend D₀ = $1. Analysts expect the firm’s dividend to grow by 20% this year, by 15% in year 2, and a constant rate of 5% in year 3 and thereafter. The required return is 20%. What is the current price of the stock?

$8.67

$9.26

$10.32

$11.04

A firm is planning its operations for next year. Data for use in the forecast are shown below. Based on the EFN equation, what is the required amount?

Last year’s sales S₀ = $350

Sales growth rate g = 30%

Last year’s total assets A₀ = $500

Last year’s profit margin M = 5%

Last year’s accounts payable = $40

Last year’s notes payable to bank = $50

Last year’s accruals = $30

Target payout ratio = 60%

____

$102.80

$108.20

$113.90

$119.90

A firm is planning its operations for next year. Data for use in the forecast are shown below. Use this expression EFN = A*/S₀(?S) – L*/S₀(?S) - mS₁(RR) to determine the required amount of external funds. State the relevant assumption imposed on the analysis.

Last year’s sales S₀ = $350

Sales growth rate g = 30%

Last year’s total assets A₀ = $500

Last year’s profit margin m = 7.5%

Last year’s accounts payable = $40

Last year’s notes payable to bank = $50

Last year’s accruals = $30

Target payout ratio = 55%

Solution

Required Rate of Return= 20% D1=1(1.20)= $       1.20 D2=1.20*(1.15)= $       1.38 D3=1.38*(1.05)= $       1.45 Future Price=D3/(R-g) 1.449/(.20-.05) $                                                                                            9.66 Present Value of stock 1.20/(1.20)+(1.38+9.66)/(1.20)^2 $       8.67 Current Expected Sales Sales $ 350.00 $                455.00 Total Assets $ 500.00 Accounts Payable $    40.00 Accrual $    30.00 Profit Margin 5% Payout Ratio 60% L0=($40+$30) $    70.00 Retention Ratio=(1-60%) $       0.40 ?S=($455-$350) $ 105.00 AFN= Ao* ?S/So- Lo * ?S/ So - S1 * PM * b AFN=(500)*(105/350)-70*(105/350)-455*5%*40% $ 119.90 Required Amount $ 119.90 Current Expected Sales Sales $ 350.00 $                455.00 Total Assets $ 500.00 Accounts Payable $    40.00 Accrual $    30.00 Profit Margin 7.5% Payout Ratio 55% L0=($40+$30) $    70.00 Retention Ratio=(1-.55) $       0.45 ?S=($455-$350) $ 105.00 AFN= Ao* ?S/So- Lo * ?S/ So - S1 * PM * b AFN=(500)*(105/350)-70*(105/350)-455*7.5%*45% $ 113.64 Required Amount $ 113.64