question 4 please
"Dividend"ed We Stand (Due Monday, October 28) Gordon Dividend Discount Model with Growth LewCo, a construction company, pays an annual dividend on December 31" of each year. LewCo paid a dividend of $10 per share on December 31, 2019 (ex-date). LewCo increased the dividend by 6% per year since the company started in 1958. 1. Today is January 2, 2020, and the current stock price is $400 per share. What expected return (r*, discount rate, cost of capital) are investors attaching to LewCo based on the dividend discount model? 400 = 88 Y: 8.5 2. Based on the model, what will be the price of the stock on January 2, 2021? Remember that the company pays a dividend on December 31" of each year. D(ug) lo(468) rg 8:51-61 = 424 - Assume an investor purchased $100,000 of LewCo stock January 2, 2020, and liquidated (sold) it a year later on January 2, 2021, after receiving the dividend payment. A. What would be the investor's price return or capital gain (percent and dollars)? Too 400 219 24-200= boop t capital gain B. What would be the investor's total return (percent and dollars)? total retum capital gaint Div Div 100 22:51 Payout the be + 2x 20 C. 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 other half 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 rate of return? LTCG=6w0 + 1280 x 720 from half of the liv Tarers 7280x134: 1087.5 2 1280 x 384: 437.5 200-13875-4373=6975 6975 +6.186 4. Paula Worth, a private wealth advisor saw your analysis of LewCo cost of capital and future price. She approaches you with an idea. She says that she can lever the $100,000 investment so that you can purchase twice as many shares of stock. Pledge the $100,000 as collateral to secure a loan of $100,000. Buy $200,000 worth of stock. Receive the dividend stream from the stock. A. What is the dividend stream from the levered position? How many dollars in year 1, dollars in year 2, etc.? B. Paula asks you to present value the stream of dividends using the r* from question 1. What is the present value of the levered dividend stream? C. The interest rate on the loan is 3%, and Paula charges a 1% fee for structuring the deal. In other words, you pay $4,000 each year to facilitate the borrowing. Present value this stream using the r* from question 1. D. Paula says that the difference between the present value of the dividends and the present value of the payments is the value of the levered position. What is the value of the levered position? E. Paula says that because the value of the levered position is greater than the original $100,000 that she has created value. Do you agree? Provide a reason
