Part A: supernormal-growth stock valuation

A firms cash dividend is expected to grow at the following rates for the next 5 years. From year 6 on, its growth rate stabilizes at 5% into the foreseeable future. The firms required rate of return is 11.75%, and its most-recent dividend was at $1.75 per share.

Year	1	2	3	4	5	6 --> Infinite
Growth rate per year, %	30	25	20	15	10	5

i. Estimate the firms current stock price in $wx.yz format

ii. If the stock is trading at $50.00 per share, what is the implied required rate of return? Give answer in % to 4 decimal places. [Hint: use Data, What-if analysis, and Goal seek functions.]

Answer:

i. Current stock price = $_________ per share. (2 decimal places)

ii. The required return implied by the $50/share stock price is ____________%. (4 decimal places)

Part B

Your firm borrows $1m to buy a warehouse. The loan is a 30-year mortgage at 6% per year with monthly repayments without any balloon payment. Create an amortization table, but print out only the 30 rows of monthly payments for the anniversary months, i.e., 12, 24, 36, , 348, and 360. The 6 needed columns are: No. of month, Beginning balance, Monthly payment, Interest, Principal reduction, Ending balance. Except for first column, all columns are to be in currency format.

Answer:

Print the 30 selected anniversary months of the amortization table in 1 page.

Estimate:

i. Percent of interest of monthly payment in first, 180^th, and last months.

Ans.: ________%; _________%; __________% (2 decimal places)

ii. Percent of equity accrued midway in the 30-year mortgage.

Ans.: _________% (2 decimal places)