Answered step by step
Verified Expert Solution
Question
1 Approved Answer
3. 14 points) A stock of a company represents a share in the ownership of the company and pays dividends to its owner. One method
3. 14 points) A stock of a company represents a share in the ownership of the company and pays dividends to its owner. One method to determine the value of a stock is to compute the present value of the discounted future dividends. Assume that there is a continuous dividend stream of R(t) = Dest, where t is time in years, D is the initial dividend (in dollars) and g is the growth rate of the dividends. The present value is given by PV = L*R(t)e-rt dt, where r is the discount rate. (a) (1.5 points for r > g, determine PV as a function of D, 9, r. (b) [1.5 points Using the following table and a discount rate of 10%, determine the growth rates of the dividends of Apple, Intel, and Microsoft. Apple Intel Microsoft D (in US$) 0.82 1.32 2.04 Stock price in US$) 112.00 49.28 204.03 Hint: Solve your formula in 3(a) for g, set PV equal to the stock prices given in the above table, and compute the value of g for each of the three companies. (c) [1 point) Assume that a certain analyst expects that the growth rate of the divi- dends of Apple will be 8%. Based on your answer of 3(b), should they recommend to buy or to sell the stock of Apple? Please give a brief explanation. While the example contains real values, it is for illustration only and does not consti- tute, and should not be understood as, investment advice. Making investment decisions requires much more sophisticated analyses than what is provided in this example
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started