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You are supposed to show which formulas you are using and/or which commands of financial calculator you are using. You are also supposed to provide
You are supposed to show which formulas you are using and/or which commands of financial calculator you are using. You are also supposed to provide short explanations of what you are doing, as well as your final numerical result. Please round all your answers up to 2 digits after decimal point (for example, cash flow should be written as $20.20 and interest rates should be written as 1.23%).
1. (18 points) Assume that you hold 100 common shares of a corporation XYZ. A new board just announced the policy that it is not going to pay dividends for the next five years. However, at the end of year 6 it will pay dividends of $50 per share, which is going to grow at 2% per year afterwards. (a) (6 points) Assuming that the required rate of return is 10%, what is the current value of your portfolio? (b) (6 points) Suppose that you've just learned that the main competitor of XYZ has big problems. As a result, you expect the board of directors to reconsider the dividend policy at the next meeting, which will happen in a year from now. In particular, you expect that the board is going to pay a fixed dividends of $30 starting from the next year. At the end of year 6, dividends will be further increased to $60, and after that they will grow at 3% per year. Assuming that the required rate of return stays the same, how will the current value of your portfolio change? (c) (6 points) Assume now that you have to immediately liquidate your portfolio. However, the stock of your company is not very liquid. In particular, you can only sell 70 stocks at the best ask price, which is 1% smaller than the stock price you found in part (b). The remaining 30 stocks can be sold at a discount of 3% relative to the price from part (b). How much can you get for your portfolioStep by Step Solution
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