Acc501 GDB no 02 idea solution 31 May 2011

[Vuhelper]

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“Mr. A” wanted to purchase a stock that is trading in market at Rs. 1,000 per share, that stock is expected to have a year-end per share dividend of Rs. 80, which is expected to grow at constant rate g throughout life. The stock’s required rate of return is 14 percent.
You are required to answer the following by analyzing the above mentioned situation:
If “Mr. A “is also an analyst, what would be value of “g”?
What will be price of stock if required rate of return is 15% and other things remain same? Should “Mr. A” purchase stock in this situation.
What will be the value of required rate of return if stock price is decreased to Rs. 700 and other thing remain same.

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[Vuhelper]

i do my best to solved that GDB i hope it perfect
(1) g = 5.56 %

(2) Price = 894.58. Yes Mr. A Purchase the stock

(3) Required rate of return =17.62 %

[Vuhelper]

SOlution
1. = 6%
2. = 888.88 Rs. at, g= 6%
and,
3. = 17% at g= 6%

see lecture#23

im not sure but my answer is that

1) g = 0.06

2) P = 1000

3) R = 17%


Another solution
1.p=D/(R-g)
1000=80/(0.14-g)
1000(0.14-g)=80
140-1000g = 80
140-80 =1000g
g= 0.06 0r 6%
2.P= D/ (R-g)

P =80/(0.15-0.06)
=80/0.09
P=888.88
3. P=D/(R-g)
700=80/(R-0.06)
700(R-0.06) = 80
700R-42 = 80

R=80+42/700
R= 80