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ABC corporation stock is selling for Rs. 150 per share according to Karachi stock exchange market summary. A rumor about the company has been heard that the firm will make an exciting new product announcement next week. By studying the industry, it is being concluded that this new product will support a growth rate of 20% in dividend for two years. After that it is expected that the growth rate in dividend will decline to 6% and remains same onwards. The firm currently pays an annual dividend of Rs. 4.

The rate of return on stocks like ABC corporation is 10%.

Required:

I. Find out the values for D1, D2 and D3 (8 Marks)

II. What will be the price of stock (P2) at the end of year 2? (4 Marks)

III. What will be the present value (P0) of stock? (6 Marks)

IV. Should we buy stocks of ABC Corporation at Rs. 150? (2 Marks)

Important Note:

You are required to show each step involved and complete calculations for each part of

question because calculations carry reasonable marks.


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Replies to This Discussion

FIN622 Assignment#1 Fall 2010 Idea Solution
See the attached file pls
Attachments:
Here is Solution of 1st Part of Assignment No. 1, Please explain the entry narration yourself.


Entry No.1
Office supplies expense (Income statement items) 432
Office supplies (Balance sheets items) 432
Entry No. 2
Depreciation Machinery (Income statement items) 132
Accumulated depreciation: Machinery (Balance sheets items) 132
Entry No. 3
Salaries (Income statement items) 660
Salaries payable (Balance sheets items) 660
Entry No. 4
Unearned consulting fee (Balance sheets items) 252
Consulting fee earned (Income statement items) 252
Entry No. 5
Consulting fee receivables (Balance sheets items) 1,020
Consulting fee earned (Income statement items) 1,020
Solution

Find out the values for D1, D2 and D3

D1= 4 (1+0.2) =4.8
D2= 4.8 (1+0.2) =5.76
D3=5.76 (1+0.05) =6.11

What will be the price of stock (P2) at the end of year 2?

P2= 5.76 (1+0.2)/ .1-0.05
P2=138.24

What will be the present value (P0) of stock?

PO= 4.8/(1+.1)1 + 5.76/(1+.1)2 + 6.11/(1+.1)3 + 128.31/(1.1)3
= 110


Should we buy stocks of ABC Corporation at Rs. 150


As the present value of the stock is less then the current selling price so the stock
should not be purchased
one more idea solution of FIN622 Assignment#1 Fall 2010
See the attached file pls
Attachments:
FIN622 SOLVED with REF

PART 1:

D1=4 x (1.2) =4.8

D2=4 x (1.2)2 = 5.76

D3=5.76x (1.06) =6.1056

PART 2:

P2= 6.1056/ (0.10-0.06) = 152.64

PART 3:

Po = D1 [PVF k, 1] + D2 [PVF k, 2] + P2 [PVF k, 2]

Po = 4.8 [PVF k, 1] + 5.76 [PVF k, 2] + 152.64 [PVF k, 2]

Po = 4.8[0.9091] +5.76[0.8264] +152.64[0.8264]

Po = 135.27

PART 4:

We should not buy the stock.

SEE THE REF:
http://www.docstoc.com/docs/38058244/Valuation-_-Characteristics-of...

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