Answer:
How are Startups Financing Requirements Estimated?
1. Make Use of a Startup Work Sheet to be Able to Plan the Initial Financing.
2. Focus on the Expenses versus Assets. Another way for startups to estimate their financing requirements is by means of focusing on the expenses versus assets.
3. Similar Articles.
4. Cash Balance Prior to the Starting Date.
Explanation:
Clare, a florist, opened a new store and wanted to purchase a new refrigeration display cabinet for fresh-flower arrangements. She entered into a deal with Alpha Refrigeration Systems for two refrigeration units at $600 each. But, after delivering the units, the salesperson demanded another $100 as delivery charges, which was not mentioned in the deal. Identify the win-lose strategy used by the salesperson.
The question is incomplete:
Clare, a florist, opened a new store and wanted to purchase a new refrigeration display cabinet for fresh-flower arrangements. She entered into a deal with Alpha Refrigeration Systems for two refrigeration units at $600 each. But, after delivering the units, the salesperson demanded another $100 as delivery charges, which was not mentioned in the deal. Identify the win-lose strategy used by the salesperson.
-Good guy-bad guy routine
-Browbeating
-Red herring
-Trial balloon
-Lowballing
Answer:
-Red herring
Explanation:
-Goog buy-bad guy routine is a strategy in which one person appears to be on your side and when you get to an agreement, this person goes to the bad guy for approval who will renegotiate.
-Browbeating is a strategy in which the buyer tries to affect the saleperson atittude by saying unflattering things.
-Red herring is a strategy in which one of the parties tries to distract the other one from certain isues to get an advantage.
-Trial balloon is an strategy in which one of the parties says something to the other one to get information about its position in the negotiation.
-Lowballing is an strategy in which the buyer makes a really low offer to test the seller.
According to the definitions, the answer is that the win-lose strategy used by the salesperson is red herring because Clara didn't consider the information related to the delivery when purchasing the units as she was probably distracted by other aspects and didn't consider this.
Match the cost variance component to its definition.
a. Actual quantity
b. Standard quantity
c. Actual price
d. Standard price Standard price drop zone empty.
1. The amount paid to acquire input.
2. The input used to manufacture the quantity of output
3. The expected input for the quantity of output
4. The expected price
Answer:
1. C
2. A
3. B
4. D
Explanation:
Price can be defined as the amount of money that is required to be paid by a buyer (customer) to a seller (producer) in order to acquire goods and services.
In sales and marketing, pricing of products is considered to be an essential element of a business firm's marketing mix because place, promotion and product largely depends on it.
In Accounting, costing is the measurement of the cost of production of goods and services by assessing the fixed costs and variable costs associated with each step of production.
The various types of cost variance components and their definition includes the following;
1. Actual price: the amount paid to acquire input.
2. Actual quantity: the input used to manufacture the quantity of output.
3. Standard quantity: the expected input for the quantity of output.
4. Standard price: the expected price.
Answer: actual quantity= input used to manufacture the quantity of output
Standard= expected input for the quantity of output
Actual= the amount paid to acquire input
Standard= expected price
Explanation:
The budgeted income statement presented below is for Burkett Corporation for the coming fiscal year. Compute the number of units that must be sold in order to achieve a target pretax income of $183,500. Sales (55,000 units) $ 990,000 Costs: Direct materials $ 202,000 Direct labor 240,500 Fixed factory overhead 102,500 Variable factory overhead 150,500 Fixed marketing costs 110,500 Variable marketing costs 50,500 856,500 Pretax income $ 133,500
Answer:
see explanation
Explanation:
Units to achieve target profit = Target Profit + Fixed Cost ÷ Contribution margin ratio.
where ,
Contribution margin ratio = Contribution ÷ Sales
A natural monopolya. exists when many sellers experience lower average total costs than potentialcompetitors do.b. exists when a firm has sole ownership of a natural resource.c. is an example of a government-created barrier.d. is needed to make a profit in the long run.e. exists when a single seller experiences lower average total costs than any potentialcompetitor.
Answer:
e. exists when a single seller experiences lower average total costs than any potential competitor.
Explanation:
A monopoly is a market structure which is typically characterized by a single-seller who sells a unique product in the market by dominance. This ultimately implies that, it is a market structure wherein the seller has no competitor because he is solely responsible for the sale of unique products without close substitutes. Any individual that deals with the sales of unique products in a monopolistic market is generally referred to as a monopolist.
For example, a public water supply company is an example of a monopoly because they serve as the only source of water provider to the general public in a society.
A natural monopoly exists when a single seller experiences lower average total costs than any potential competitor because of the very high start-up or initial cost and economy of scale.
Dawson Toys, Ltd., produces a toy called the Maze. The company has recently created a standard cost system to help control costs and has established the following standards for the Maze toy:
Direct materials: 6 microns per toy at $1.50 per micron
Direct labor: 1.3 hours per toy at $21 per hour
During July, the company produced 3,000 Maze toys. The toy's production data for the month are as follows: Direct materials: 25,000 microns were purchased at a cost of $1.48 per micron. 5,000 of these microns were still in inventory at the end of the month. Direct labor: 4,000 direct labor-hours were worked at a cost of $88,000.
Required:
Compute the variances for July.
Answer and Explanation:
The computation of the variance is shown below;
a) Material price variance is
= (Standard price - actual price) × actual quantity
= ($1.5 - $1.48) × 25000
= $500 F
b. Material quantity variance is
= (Standard quantity - actual quantity) × Standard price
= (3000 × 6 - 20,000) × 1.5
= $3,000 U
c) Labor rate variance is
= (Standard rate - actual rate) × actual hours
= ($21 × 4000 - $88,000)
= $4,000 U
d. Labor efficiency variance is
= (Standard hour - actual hour) × Standard rate
= (3000 × 1.3 - 4000) × 21
= $2,100 U
Susan is a plant manager in charge of a factory in a relatively poor country. Even though market wages are low, she decides to raise the wages of her workers. Her decision A. might increase profits if it means that the wage is high enough for her workers to eat a nutritious diet that makes them more productive. B. will help eliminate the excess supply of labor. C. may cause her workers to reduce the effort they expend at their jobs. D. All of the above are correct.
Answer:
A. might increase profits if it means that the wage is high enough for her workers to eat a nutritious diet that makes them more productive
Explanation:
Since in the given situation, it is mentioned that she wants to increase the wages of her workers even though market wages are less. This decision would be taken to rise the profits so that the labor have enough to eat a nutritious diet due to which they give more productivity this results in accomplish the company goals & objectives in an efficient way
hence, the option is a.
sino po crush nyo char
Answer:
Your ugly
Explanation:
Dream House Builders, Inc. applies overhead by linking it to direct labor. At the start of the current period, management predicts total direct labor costs of $100,000 and total overhead costs of $20,000. On January 31, the direct labor for this job equals $2,700.
Required:
Write the journal entry.
Answer:
Explanation:
To solve this question, we need to calculate the predetermined overhead rate first and this will be:
= Estimated overhead / Direct labor cost
= $20,000 / $100,000
= 20% of cost of direct labor
Then we calculate the factory overhead which will be:
= Direct Labor × Predetermined overhead rate
= $2700 × 20%
= $540
Then, the journal entry will be:
31 Dec:
Debit Work in Process $540
Credit: Factory overhead $540
(To record overhead applied).
Company A owns a 40% equity method investment in Company B. Subsequently, Company A acquires a controlling interest in a Company B and now must prepare consolidated financial statements. If the date Company A obtains control occurs midyear, how are subsidiary revenues and expenses reported in consolidated income statement in the year of the business combination
Answer:
Pre acquisition subsidiary revenues and expenses are excluded from consolidated revenue and expenses. Post acquisition subsidiary revenues and expenses are included in consolidated revenues and expenses.
Explanation:
Company A has acquired control over company B. When accounting for the consolidated financial statement the pre acquisition revenues and expenses will not be included, only post acquisition revenues and expenses will be included in the consolidated statement and they will be accounted for according to controlling percentage.
Copper and nickel electroless plating processes are under consideration for printed circuit boards. The copper process has fixed costs of $110,000 per year with a variable cost of $50 per batch. The nickel process has a fixed cost of $85,000 per year and a variable cost of $90 per batch. Determine the number of batches that must be produced each year in order for the processes to break even.
Answer:
see explanation
Explanation:
The question has missing sales price information, however explanations are provided below
Break even point is the level at which a company makes neither a profit nor a loss.
Break even point (units) = Fixed Costs ÷ Contribution per unit
Step 1 :
Find Contribution per unit of each process and add the unit contributions to find the total unit contribution
Contribution = Sales - Variable Costs
Step 2
Find the Total Fixed Costs for both the copper process and nickel process.
Step 3
Determine the sales mix for copper process and nickel process
Step 4
Calculate the Break even units for the 2 processes combined. After that multiply the respective mixes to the break even point
Which of the following is not characteristic of long-run equilibrium under monopolistic competition? Price equals minimum average total cost. marginal cost equals marginal revenue. Price is equal to average total cost. Price exceeds marginal cost.
Answer:
Price equals minimum average total cost.
Explanation:
A monopoly is a market structure which is typically characterized by a single-seller who sells a unique product in the market by dominance. This ultimately implies that, it is a market structure wherein the seller has no competitor because he is solely responsible for the sale of unique products without close substitutes.
Monopolistic competition can be defined as the market structure which comprises of elements of competitive markets (having many competitors) and monopoly.
Under monopolistic competition, organizations earn profits in the long-run equilibrium.
In long-run equilibrium under monopolistic competition, price does not equal minimum average total cost.
When a monopolistically competitive firm is in long-run equilibrium, marginal revenue is equal to marginal cost . This ultimately implies that in the long-run, firms engaging in monopolistic competitive market are often going to manufacture the quantity of goods where the marginal cost (MC) curve intersect with the marginal revenue (MR). Also, the price set would be greater than the minimum average total cost (ATC).
Which of the following statements is CORRECT?
a. A 10-year coupon bond would have more price risk than a 5-year coupon bond, but all 10-year coupon bonds have the same amount of price risk.
b. A zero coupon bond of any maturity will have more price risk than any coupon bond, even a perpetuity.
c. If their maturities and other characteristics were the same, a 5% coupon bond would have more price risk than a 10% coupon bond.
d. A 10-year coupon bond would have more reinvestment risk than a 5-year coupon bond, but all 10-year coupon bonds have the same amount of reinvestment risk.
e. If their maturities and other characteristics were the same, a 5% coupon bond would have less price risk than a 10% coupon bond.
Answer: c. If their maturities and other characteristics were the same, a 5% coupon bond would have more price risk than a 10% coupon bond.
Explanation:
Price risk of a bond is the risk that the bond changes price or rather the degree of price volatility. Bond prices change in reaction to market interest rates with higher rates meaning lower prices and lower rates meaning higher prices.
When the market interest rates rise above the Coupon on a bond, the bond price will fall below par and when the interest rates are below the coupon, the bond will be above par.
A 5% coupon bond will be more prone to changes in prices because market interest rates are generally low and fluctuate below 10% which means that they will affect the 5% bond more than the 10% because there are better chances of rates rising above or falling below 5% than there are of 10%.
The following data relate to Ramesh Company’s defined benefit pension plan: ($ in millions) Plan assets at fair value, January 1 $ 780 Expected return on plan assets 78 Actual return on plan assets 62 Contributions to the pension fund (end of year) 136 Amortization of net loss 16 Pension benefits paid (end of year) 23 Pension expense 108 Required: Determine the amount of pension plan assets at fair value on December 31. (Enter your answers in millions. Amounts to be deducted should be indicated with a minus sign.
Answer:
$955 million
Explanation:
Calculation to Determine the amount of pension plan assets at fair value on December 31
(millions)
Plan Assets Beginning of the year $780
Actual return $62
Cash contributions $136
Less: Retiree benefits($23)
End of the year pension plan assets $955
Therefore the amount of pension plan assets at fair value on December 31 is $955 million
Assume that a speculator purchases a put option on British pounds (with a strike price of $1.50) for $0.05 per unit. A pound option represents 31,250 units. Assume that at the time of the purchase, the spot rate of the pound is $1.51 and continually rises to $1.62 by the expiration date. The highest net profit possible for the speculator based on the information above is: Group of answer choices $1,562.50 -$1,250.00 -$625.00 -$1,562.50
Answer:
-$1,562.50
Explanation:
Calculation to determine The highest net profit possible for the speculator based
Premium of the option = $.05 per unit * (31,250 units)
Premium of the option= -$1,562.50
Therefore Based on the information given and the above calculation The HIGHEST NET PROFIT that will be possible for the speculator will be -$1,562.50
Motivation is defined as the psychological processes that arouse and direct our goal-directed behavior. Motivation is a multifaceted, complex phenomenon, but even so it can be illustrated through a fairly simple model. This activity is important because it is imperative that managers understand the process of motivation if they are to guide their employees in accomplishing organizational objectives. Match each item to the component of the simple model of motivation that it best depicts.
a. Rewards
b. Motivation
c. Unfulfilled need
d. Behaviors
e. Feedback
1. Desire is created to get things like food or water.
2. You search for ways to get things like food or water.
3. You make a choice for how to get things like food or water.
4. These can be either intrinsic or extrinsic.
5. Information tells you whether your choices worked or not.
Answer:
Motivation
Matching items to the component of the simple model of motivation that they best depict:
Item Component
1. Desire is created to get things like food or water. Unfulfilled need
2. You search for ways to get things like food or water. Motivation
3. You make a choice for how to get things like food or water. Behaviors
4. These can be either intrinsic or extrinsic. Rewards
5. Information tells you whether your choices worked or not. Feedback
Explanation:
Components of Motivation:
a. Rewards: can be intrinsic or extrinsic to the person receiving them.
b. Motivation: is a stimulating process.
c. Unfulfilled need: a desire or drive.
d. Behaviors: actions taken to satisfy a need.
e. Feedback: evaluative information after the event.
A machine purchased three years ago for $360,000 has a current book value using straight-line depreciation of $200,000; its operating expenses are $30,000 per year. A replacement machine would cost $240,000, have a useful life of nine years, and would require $13,000 per year in operating expenses. It has an expected salvage value of $65,000 after nine years. The current disposal value of the old machine is $85,000; if it is kept 9 more years, its residual value would be $10,000.
Required:
a. Calculate the total costs in keeping the old machine and purchase a new machine.
Old machine New Machine
Total cost :
b. Should the old machine be replaced?
Yes
No
Answer: See explanation
Explanation:
a. Calculate the total costs in keeping the old machine and purchase a new machine.
The total costs in keeping the old machine will be:
Opportunity cost = $85000 - $10000 = $75000
Add: Opening costs = 30000 × 9 = $270000
Total cost = $75000 + $270000 = $345000
The total cost in buying a new machine will be:
Opportunity cost = $240000 - $65000 = $175000
Add: Opening costs = 13000 × 9 = $117000
Total cost = $175000 + $117000 = $292000
b. Should the old machine be replaced?
Yes. The old machine should be replaced because it's cost is higher.
Suppose you are a manager of a firm that operates in a duopoly. Recently, the state attorney general fined you and your competitor for price fixing. In your market, firms only set prices, not total quantities to sell. From previous experience, you know your competitor has a marginal cost of $ 6.72 . Further, your marginal costs are $ 6.70 . The previous cartel price was $10.00, when you and your competitor were price fixing.
Required:
What price level do you now choose to maximize profits?
Answer: The price level chosen to maximize profits will be $ 6.71
Explanation:
Whenever there is price fixing between two competitors, and one of the competitor decides to choose a price level. Such competitor must ensure that the price level chosen to maximize profit does not exceed his or her competitor's marginal cost but can be above his or her marginal cost .
Since the price fixing is $10 from previous cartel price so the best price level to maximize the profit would be less than my rival's price of $ 6.72 and more than my marginal cost of $ 6.70 which is $ 6.71
Transferred-in costs, FIFO method. Refer to the information in Exercise 17-31. Suppose that Trendy uses the FIFO method instead of the weighted-average method in all of its departments. The only changes to Exercise 17-31 under the FIFO method are that total transferred-in costs of beginning work in process on June 1 are $45,000 (instead of $60,000) and total transferred-in costs added during June are $114,000 (instead of $117,000).
Required:
Using the FIFO method. Note that you first need to calculate equivalent units of work done in the current period (for transferred-in costs, direct materials, and conversion costs) to complete beginning work in process, to start and complete new units, and to produce ending work in process.
Answer:
Beginning work in process $69,000
Transferred in cost $115,000
Direct material 0
Conversion cost $20,000
Ending work in process $272,000
Transferred in cost $159,000
Direct material $27,000
Conversion cost $86,000
Explanation:
FIFO method is the one in which the inventory bought first is used first. Weighted average inventory system determines an average rate for all the inventory purchased and that rate is used for the calculation. Both method are used widely but there will be difference in ending inventory in the two methods.
On December 1, 2020, Sheridan Corporation incurs a 15-year $400000 mortgage liability in conjunction with the acquisition of an office building. This mortgage is payable in monthly installments of $4800, which include interest computed at the rate of 12% per year. The first monthly payment is made on December 31, 2020. The portion of the second monthly payment made on January 31, 2021, which represents repayment of principal is: $800. $4800. $808. $3992.
Viola has to relocate for her job. She finds a townhome with an option to rent or buy. The conditions of each are shown below. Rent: Move-in costs of $2,380 and.monthly payment of $845. Buy: Move-in costs of $5,260 and monthly payment of $785. Viola moves frequently due to her job, but she thinks that she will stay in the area for 4 years. Therefore, she decided to buy. Cho0se the best evaluation of Viola's deci a. Since the costs would be the same over the 4 year period, she will have made a good decision if the property value does not decrease. b. She made a fairly good decision. Buying the townhome will be cheaper over the 4 year period as long as she doesn't have major repairs to make. C. She made a poor decision if the property value does not increase. Renting the townhome would be cheaper over the 4 year period. d. There is not enough information given to determine which option is best.
Answer: C
Explanation: i took a test on k12 with the same answer
Answer:
A
Explanation:
Since the costs would be the same over the 4 year period, she will have made a good decision if the property value does not decrease.
Kingston Specialty Corporation manufactures joint products P and Q. During a recent period, joint costs amounted to $80,000 in the production of 20,000 gallons of P and 60,000 gallons of Q. Kingston can sell P and Q at split-off for $2.20 per gallon and $2.60 per gallon, respectively. Alternatively, both products can be processed beyond the split-off point, as follows: P Q Separable processing costs $ 15,000 $ 35,000 Sales price (per gallon) if processed beyond split-off $ 3 $ 4 The joint cost allocated to Q under the net-realizable-value method would be:
Answer:
The joint cost allocated to Q under the net-realizable-value method would be $62,400.
Explanation:
Note: See the attached excel file for the Calculation of the increase or decrease in profit if the products are processed further using net-realizable-value method to allocate Joint Cost.
From the attached excel file, the Product Q Share of joint costs at split-off (in bold red color is $62,400.
Therefore, the joint cost allocated to Q under the net-realizable-value method would be $62,400.
ABC Corporation has total assets of 120 million, total liabilities of 80 million, Goodwill of 12 million, and 4 millions of shares outstanding. If you believe the reasonable price to tangible book value should be 1.6 for this company, what is the implied share price of ABC
Answer: $16
Explanation:
Implied share price = Book value per share * Price to tangible book value
Book value per share = (Assets - Liabilities) / Number of shares outstanding
= (120 - 80) / 4
= $10
Implied share price = 10 * 1.6
= $16
Woody Lightyear is considering the purchase of a toy store from Andy Enterprises. Woody expects the store will generate net cash flows (cash inflows less cash outflows) of $60,000 per year for 20 years. At the end of the 20 years, he intends to sell the store for $600,000. To finance the purchase, Woody will borrow using a 20-year note that requires 9% interest.
Required:
What is the maximum amount Woody should offer Andy for the toy store?
Answer: $654,769
Explanation:
Woody should find the present value of the cash inflows and the amount he plans to sell the company for after 20 years.
As the cash inflows are constant, they are an annuity.
Present value of annuity = Annuity * Present value interest factor of an annuity, 9%, 20 years
= 60,000 * 9.1285
= $547,710
Add the present value of the selling price:
= 547,710 + 600,000 / (1 + 9%)²⁰
= $654,768.53
= $654,769
The maximum amount woody should offer is $654,769.
What is the present value annuity factor?The present value annuity factor is used to calculate today's value of future one-dollar cash flows.
P = PMT * [1 – [ (1 / 1+r)^n] / r]
Given:
Net cash flows=$60,000 for 20 years
Sale price after 20 years=$600,000
Interest Rate=9%
As the cash inflows are constant, their is annuity.
Present value of annuity = Annuity X Present value annuity factor(at the rate 9% for 20 years)
= 60,000 X 9.1285
= $547,710
the selling price should be added as it is the current /todays price
= 547,710 + 600,000 / (1 + 0.9)²⁰
= $654,768.53
= $654,769
Therefore, the above calculation aptly describes $654,769 is the maximum amount Woody should offer.
Learn more about the present value annuity factor here:
https://brainly.com/question/21801625
Forecasting is the heart of planning process. Explain
Answer:
Forecasting is a very important step in the planning process, so much that without forecasting, the planning process for a project of a firm as a whole would not be possible.
Explanation:
The reason is that by definition, planning corresponds to a process that will be realized at some point in the future, (whether in the long or short-term depends on the planning horizon), and for the most part, information about the future is uncertain, and hard to predict. For that reason, the planning process must use forecasting methods to determine important variables like future sales, future revenue, future costs, and so on.
There are many forecasting techniques. For the most part, these techniques are statistical in nature and based on past information that is supposed to replicate somehow in the future. However, sometimes, more qualitative or intuitive forecasting methods are used, when statistical information is hard to come by.
A borrower has secured a 30-year, $150,000 loan at 7% with monthly payments. Fifteen years later, the borrower has the opportunity to refinance with a fifteen-year mortgage at 6%. However, the up-front fees, which will be paid in cash, are $2,500. What is the return on investment if the borrower expects to remain in the home for the next fifteen years
Answer:
Return on investment ≈ 29%
Explanation:
using excel function
Determine :
Rate = 7% / 12 = 0.0058
Nper value = 30 years * 12 = 360
PV = -$150,000
∴ PMT value = $997.95
next : calculate the outstanding balance 15 years later
= ( 997.95 / 0.00583 ) * ( 1 - ( 1 / ( 1 + 0.00583 )^15*12 ))
= 171174.96 * 0.6489
= $ 111,075.43
Considering the opportunity to refinance
Rate = 6% /12 = 0.005
Nper = 15 * 12 = 180
Pv = - $111,075.43
∴ PMT = 937.32
the monthly saved up payment = PMT 1 - PMT 2
= 997.95 - 937.32 = $60.63
Finally
Rate of return on investment
= 2500 = 60.63 * [tex]( \frac{1 - (\frac{1+r}{12})^{-15*12} }{r} )[/tex]
hence Rate of return ≈ 29 %
attached below is a screenshot of the excel function used for question 2 and it can be used for question 1 as well just change the values
The economy is in long-run equilibrium. Technological change shifts the long-run aggregate supply curve $120 billion to the right. At the same time, government purchases increase by $30 billion. If the MPC equals 0.8 and the crowding-out effects are $30 billion, we would expect that in the long run. (C)
a. real GDP would be higher but the price level would be lower
b. both real GDP and the price level would be lower
c. real GDP would be higher but the price level would be the same
d. both real GDP and the price level would be higher
Answer:
C. Real GDP would be higher but the price level would be the same
Explanation:
Real gdp would get to be higher as long run aggregate supply goes up. Prices would go down because as long run aggregate supply goes up, aggregate demand does not experience the same proportional increase. As long run aggregate supply goes up, short run aggregate supply falls backwards.
Your Submission:
1
Which of the following is not an objective of compensating employees?
To motivate employees
To be fair and consistent to all categories of international employees
To attract valuable personnel
To facilitate the transfer of employees no matter the cost
2
What is the first and most frequent international HR concern?
Training programs
O Expatriate com
Answer:
An organization do not need to compensate employee in order to be fair. If there's someone doing that it is not totally wrong though, it will encourage haziness and uncared attitude in such organization.
All of the following are potential exchanges between the fan and the event EXCEPT
Ticket purchases
Purchase of ancillary products
Purchase of sponsor products
Referrals
Answer:
Purchase of sponsor products
Explanation:
25 points and brainliest. Dawn works in a car manufacturing factory. She spends her day
assembling the locks for car doors and placing them along an assembly
line. The pathway in the Manufacturing career cluster that Dawn
works in is
Production
Manufacturing Production Process Development
Maintenance, Installation & Repair
Quality Assurance
Answer:
im pretty sure the answer is "Manufacturing Production Process Development"
Answer:
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Explanation:
A certain company just announced it will cut next year's dividends from $4 to $2.50 per share and use the extra funds to expand. Prior to the announcement, the company's dividends were expected to grow at a 4% rate, and its share price was $50. With the planned expansion, the company's dividends are expected to grow at a 6% rate. What share price (in dollars) would you expect after the announcement
Answer:
P0 = $41.6666666 rounded off to $41.67
Explanation:
The constant growth model of dividend discount model (DDM) can be used to calculate the price of the stock today. DDM calculates the price of a stock based on the present value of the expected future dividends from the stock. The formula for price today under constant growth DDM is,
P0 = D1 / (r - g)
Where,
D1 is the dividend expected in Year 1 or next year
g is the constant growth rate in dividends
r is the discount rate or required rate of return
We first need to calculate the required rate of return for this company based on the previous growth rate, dividend and current share price prior to announcement.
50 = 4 / (r - 0.04)
50 * (r - 0.04) = 4
50r - 2 = 4
50r = 4 + 2
r = 6 / 50
r = 0.12 or 12%
Now using the post announcement data, the new share price will be,
P0 = 2.5 / (0.12 - 0.06)
P0 = $41.6666666 rounded off to $41.67