ECO 029, chapter 7

What basic principle of finance can be applied to the valuation of any investment asset?A-Present value.B-Price-earnings ratio.C-Internal rate of return.D-Cash flow analysis. (A) Present Value
Identify the cash flows available to an investor in stock.A-Corporate profits.B-Net income after taxes.C-Retained earnings.D-Dividends and capital gains. (D) Dividends and capital gains.
Compute the price of a share of stock that pays a $2.00 per year dividend and that you expect to be able to sell in one year for $50, assuming you require a 20% return. P0=Div1/(1+ke) + P1/(1+ke)P0 = $43.33
After careful analysis, you have determined that a firm’s dividends should grow at 5%, on average, in the foreseeable future. The firm’s last dividend was $0.50. Compute the current price of this stock, assuming the required return is 10%. P0=D1/(ke-g) D1=0.50 x 1.05=0.525P0=0.525/(0.10-0.05)P0 = $10.50

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