Managerial Economics: Applications, Strategies and Tactics (MindTap Course List)
14th Edition
ISBN: 9781305506381
Author: James R. McGuigan, R. Charles Moyer, Frederick H.deB. Harris
Publisher: Cengage Learning
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Chapter 17, Problem 6E
To determine
To calculate:The
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Consider company ABC. Today it is 1st of January 2023 and ABC has just paid a dividend of £3 million. The expected earnings of ABC for the next 30 years are forecast to grow at a rate of 15% per annum. From 1st of January 2053 and onwards the earnings of ABC are expected to grow at a rate of 5%. The required rate of return of ABC is 12% per annum.
The current dividend policy of ABC is such that they pay out 50% of its earnings as dividends (assume that they pay their dividends on 1st of January every year).
a) Suppose that the dividend payout ratio is expected to stay constant in the future. What is the value of ABC stock? Show and explain your calculations and any assumptions you make.
b) Just after the dividend payment on 1st of January 2043, ABC is planning to reduce their dividends and only pay out 40% of its earnings. What is the value of ABC under the new dividend policy?
c) Provide a recommendation to the management of ABC as to whether they should increase/cut back on…
a) Assume we are now in mid- or late February 2022. After conducting your own analysis, you have made a decision to buy shares of ENV in March. However, your friend, Jaden who is a financial advisor for ENV tells you that ENV's earnings for the fourth quarter 2021 is higher than the analyst estimates. He suggests you to buy its shares immediately (i.e. in midor late February 2022) before this information is announced to the public (and price increases). Please state and explain which CFA Institute Code and Standards Jaden has breached.
ABC Company's most recent dividend (D0) was $10 and its dividends growth rate is 5% percent per year. If an investor with 15% required rate of return sells the stocks at $113 in the 2nd year, he/she would have a ____ because the true price of the stocks in the 2nd year (P2) would be _____
a
Gain; $115,76
b.
Loss; $115,76
c.
Gain; $110,25
d.
Loss; $110,25
Chapter 17 Solutions
Managerial Economics: Applications, Strategies and Tactics (MindTap Course List)
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