Question
A.Today is January 1, 2020, and the stock price is $400 per share. What expected return (r*, discount rate, cost of capital) are investors attaching
A.Today is January 1, 2020, and the stock price is $400 per share. What expected return (r*, discount rate, cost of capital) are investors attaching to LewCo based on the Gordon Growth Model? 8.65% <--- ANSWER
B.Based on the model, what will be the stock price on January 1, 2021 (one year in the future)? Remember that the company pays a dividend on December 31 of each year; your answer should be the value after the dividend payment on December 31, 2020. $424.00 <--- ANSWER
Assume an investor purchased $100,000 of LewCo stock on January 1, 2020, and liquidated (sold) it a year later on January 2, 2021, after receiving the dividend payment.
C.What is the investor's price return or capital gain? State your answer in dollars and cents, for example, $12,345.67.
250 shares; $24.00 price appreciation per share; $6000.00 (6% of $100,000), g=6% <--- ANSWER
D.What is the investor's total return? State your answer in dollars and cents, for example, $12,345.67.
250 shares; $24.00 price appreciation plus $10.60 dividend; $8,650 (8.65% of $100,000), r=8.65% <--- ANSWER
1.Paula Worth, a private wealth advisor, saw your analysis of the LewCo cost of capital and future price (questions A & B above). She approaches you with an idea to lever the $100,000 investment so that you can purchase twice the shares of stock. She proposes to structure the investment as follows:
-Buy 250 shares of stock using the $100,000.
-Pledge the shares as collateral to secure a loan of another $100,000.
-Buy another 250 shares using the loan proceeds; thus, the investor will own a total of 500 shares of stock.
-The next annual dividend payment will be $5,300, and payments will grow by 6% per year, as originally assumed.
Paula suggests that you calculate the present value of the stream of dividends using the r* from question B. She says that process creates value because the present value of the levered investment exceeds the original $100,000 invested. Calculate the present value of the levered dividend stream, and explain if Paula is correct that the leverage created value.
2.This question is a continuation of parts C and D above. The tax on long-term capital gains is 15%, and the tax on regular income is 35%. Half of the dividend qualifies for long-term capital gains treatment; the remainder is regular income. The investor held the stock for more than a year (barely), so she receives long-term capital gains on the price appreciation. What is the after-tax total return (price appreciation plus dividend minus taxes)?
ANSWER 1 & 2 PLEASE (THE VALUES REFERRING TO A,B,C,D ARE PROVIDED ABOVE )
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