Answer:
Maximum price = $ 1,325,000
Explanation:
The maximum price to be paid for the company is the present value of the annual profit discounted at the rate of return on equity.
The return on equity can be calculated using the capital asset pricing model (CAPM)
Under CAPM,
E(r)= Rf + β(Rm-Rf)
E(r)- expected return, Rf-risk-free rate , β= Beta, Rm= Return on market.
Using this model, we can work out the value of beta as follows:
Ke= ?., Rf- 2%, Rm-Rf - 8%
Ke- 2% + 1.5× (8%)= 14 %
Price for the company can now be determined using the present value of the perpetuity formula with growth as follows:
The model is represented below:
P = A ×(1+g)/ ke- g
DATA
A- 100,000
g- 6%
ke- 14%
Price = 100,000× (1.06)/(0.14-0.06)= $ 1,325,000
Maximum price = $ 1,325,000
Aggregate income in an economy in 2017 is $100 billion. Saving is $30 billion and imports are $35 billion. What is aggregate expenditure in the economy in 2017?
Answer: $100 billion
Explanation:
In Economics, Aggregate Income is assumed to be the same as Aggregate Expenditure. The assumption behind this is that every dollar spent is a dollar in income from someone else so every income is just a dollar that will be spent.
With that logic in a country that has Aggregate income of $100 billion, the Aggregate Expenditure will be $100 billion as well.
Your supervisor instructs you to purchase 480 pens and 6 staplers for the workplace. Pens are purchased in sets of 6 for $2.45. Staplers are sold in sets of 2 for $14.95. How much will the purchase of these products cost?
Answer:
Total cost= $225.9
Explanation:
Giving the following information:
Your supervisor instructs you to purchase 480 pens and 6 staplers for the workplace.
Pens are purchased in sets of 6 for $2.45.
Staplers are sold in sets of 2 for $14.95.
First, we need to calculate the number of "packs" to buy:
Pens= 480/6= 80
Staplers= 6/2= 3
Total cost= 80*2.45 + 2*14.95= $225.9
f covered interest arbitrage opportunities do not exist, Group of answer choices interest rate parity holds. interest rate parity does not hold. interest rate parity holds, and arbitragers will be able to make risk-free profits. arbitragers will be able to make risk-free profits. interest rate parity does not hold, and arbitragers will be able to make risk-free profits.
Answer: interest rate parity holds
Explanation:
Covered interest arbitrage is a trading strategy that is used by an investor when the person whereby takes advantage of the differences in interest rate between two nations and invest in the currency that brings higher value.
If covered interest arbitrage opportunities do not exist, it simply means that interest rate parity holds.
What happens to the Purchasing Power of Money, Prices and the Nominal Rate of Interest in CASE 1: the case of an increasing supply of money and credit? CASE 2: the case of a decreasing supply of money and credit? CASE 3: the case of an increasing demand for money and credit? CASE 4: the case of a decreasing demand for money and credit?
Answer:
Case 1: The purchasing power of money will decrease, prices will increase and nominal interest rate will decrease.
Case 2: The purchasing power of money will increase, prices will decrease and nominal interest rate will increase.
Case 3: The purchasing power of money will increase, prices will decrease and nominal interest rate will increase.
Case 4: The purchasing power of money will decrease, prices will increase and nominal interest rate will decrease.
Explanation:
Case 1: The purchasing power of money will decrease, prices will increase and nominal interest rate will decrease.
Case 2: The purchasing power of money will increase, prices will decrease and nominal interest rate will increase.
Case 3: The purchasing power of money will increase, prices will decrease and nominal interest rate will increase.
Case 4: The purchasing power of money will decrease, prices will increase and nominal interest rate will decrease.
Green Thumb Garden Tools Inc. produces and sells home and garden tools and equipment. A lawnmower has a total cost of $230 per unit, of which $160 is product cost and $70 is selling and administrative expenses. In addition, the total cost of $230 is made up of $120 variable cost and $110 fixed cost. The desired profit is $58 per unit. Determine the markup percentage on product cost.
Answer:
80%
Explanation:
The computation of markup percentage on product cost is shown below:-
Markup percentage on product cost = ((Selling and administrative expenses + Desired profit) ÷ Product cost) × 100
= (($70 + $58) ÷ $160) × 100
= 0.8
or
= 80%
Therefore for computing the markup percentage on product cost we simply applied the above formula.
Suppose taxi fares from Logan Airport to downtown Boston is known to be normally distributed and a sample of seven taxi fares produces a mean fare of $22.31 and a 95% confidence interval of [$20.5051, $24.2091]. Which of the following statements is a valid explanation of the confidence interval.
A) 95% of all taxi fares are between $20.51 and $24.21.
B) We are 95% confident that a randomly selected taxi fare will be between $20.51 and $24.21.
C) The mean amount of a taxi fare is $22.31, 95% of the time.
D) We are 95% confident that the average taxi fare between Logan Airport and downtown Boston will fall between $20.51 and $24.21.
Answer: D) We are 95% confident that the average taxi fare between Logan Airport and downtown Boston will fall between $20.51 and $24.21.
Explanation:
The Confidence interval allows one to speculate between which values the average of a population will be. In a 95% confidence interval, this means that we are 95% certain that the average value of a variable will be between the higher and lower limits set by the interval.
The 95% confidence interval here has an upper limit of $24.2091 and a lower limit of $20.5051 for taxi fares from Logan Airport to downtown Boston. This means that with a 95% certainty, the taxi charge from Logan Airport to downtown Boston will be between these 2 charges so you can expect to pay an amount between them.
A bond with par value of $1,000 has an annual coupon rate of 4.8% and currently sells for $970. What is the bond’s current yield? (Round your answer to 2 decimal places.)
Answer:
The Bond's Current yield = 4.95%
Explanation:
Annual coupon = Value of Bond * Annual Coupon rate
Annual coupon = $1000 * 4.8%
Annual coupon =$48
The Bond Current yield =Annual coupon / Current price
The Bond Current yield = $48 / $970
The Bond Current yield = 0.049485
The Bond Current yield = 4.9485
The Bond Current yield = 4.95%
A customer buys a variable annuity and elects a payout option of Life Income with a 20 year period certain. This means that payments will continue for:
Answer:
the annuitant's life, but if he dies before 20 years elapse, payments continue to his heir(s)
Explanation:
An annuity life payment is a financial option that continues until the annuitant dies. a lump sum payment is made by this annuitant which he uses in securing a payout option of Life Income with a 20 year period certain . This annuity would continues for as long as the customer or annuitant is alive, but if he dies before that certain period, Someone else, that is a beneficiary or heir would be entitled to the payment until that period of 20 years elapses.
A company with $70,000 in current assets and $50,000 in current liabilities pays a $1,000 current liability. As a result of this transaction, the current ratio and working capital will
The question is missing the options and is incomplete. The q=complete question is,
A company with $70,000 in current assets and $50,000 in current liabilities pays a $1,000 current liability. As a result of this transaction, the current ratio and working capital will:
a. both decrease
b. both increase
c. remain the same and decrease, respectively
d. increase and remain the same, respectively
Answer:
The correct answer is option D as the current ratio has increased while the working capital has remained the same.
Explanation:
The current ratio is calculated by dividing the current assets by the current liabilities. The formula for current ratio is,
Current ratio = Current assets / current liabilities
The old current ratio was,
Current ratio = 70000 / 50000 = 1.4
After the transaction, the new current ratio is,
Current ratio = (70000 - 1000) / (50000 - 1000) = 1.408
Thus, as a result of the transaction, the current ratio has increased.
The working capital is the difference between the value of current assets and the value of current liabilities.
The formula to calculate the working capital is,
Working capital = Current assets - Current liabilities
Old working capital = 70000 - 50000 = $20000
The new working capital = 69000 - 49000 = $20000
Thus, the working capital remain unchanged after the transaction.
A price-discriminating monopolist having identical costs in two markets should charge a higher price in that market Group of answer choices
Complete Question:
A price-discriminating monopolist having identical costs in two markets should charge a higher price in that market:
Group of answer choices.
A. which has a higher demand.
B. which has a more elastic demand.
C. which has a less elastic demand.
D. which has a higher marginal revenue.
Answer:
C. which has a less elastic demand.
Explanation:
In competitive marketing, a price-discriminating monopolist is any individual or business entity which charges various customers different prices for its finished products or services, even though the products are similar, identical or homogeneous in nature and there cost of production is the same.
A price-discriminating monopolist having identical costs in two markets should charge a higher price in that market which has a less elastic demand because there are no close substitutes or alternatives for the goods and services.
For instance, if there's a gasoline or fuel hike in a particular state, a price-discriminating monopolist would charge higher price because gasoline or fuel is inelastic in the short-run or has a less elastic demand at the time.
Exercise 10-1 Recording bond issuance and interest LO P1 On January 1, 2017, Boston Enterprises issues bonds that have a $3,400,000 par value, mature in 20 years, and pay 9% interest semiannually on June 30 and December 31. The bonds are sold at par. 1. How much interest will Boston pay (in cash) to the bondholders every six months
Answer:
Semi-annual interest payment=$153,000
Explanation:
The interest payment on the bond is an expense which would be incurred twice a year because the terms and conditions of the bond contract is that interest be paid semi-annually, that is every six month.
This implies that we would need to work out the interest rate applicable for every six month. This is doe as follows:
Semi-annual interest rate = Annual interest rate / 2
Annual interest rate = 9%
Semi-annual interest rate = 9%/2= 4.5%
Semi-annual interest payment = Interest rate × Nominal value of Bond
Semi-annual interest payment = 4.5% × $3,400,000=$153,000
Semi-annual interest payment= $153,000
On May 1, 2010, Ziek Corp. declared and issued a 10% common stock dividend. Prior to this dividend, Ziek had 100,000 shares of $1 par value common stock issued and outstanding. The fair value of Ziek 's common stock was $20 per share on May 1, 2010. As a result of this stock dividend, Ziek's total stockholders' equity:_________
Answer: did not change
Explanation:
From the question, we are informed that On May 1, 2010, Ziek Corp. declared and issued a 10% common stock dividend and that prior to this dividend, Ziek had 100,000 shares of $1 par value common stock issued and outstanding. We are further informed that the fair value of Ziek 's common stock was $20 per share on May 1, 2010.
As a result of this stock dividend, Ziek's total stockholders' equity did not change. The accounts involved belong to the stockholders' equity, therefore, there will be no change on the total stockholders equity.
Merchandise inventory: Multiple Choice Is a current asset. Is a long-term asset. Must be sold within one month. Is classified with investments on the balance sheet. Includes supplies the company will use in future periods.
Answer: is a current asset
Explanation:
Merchandise inventory is the product thqtbare owned by a company which the company wants to sell.
It should be noted that when preparing the balance, merchandise inventory sheet is reported as current asset.
Also, buying merchandise inventory is part of a business operating cycle.
What is the equivalent annual annuity of a project that requires an investment of $50,000 today and is expected to generate free cash flows of $15,000 per year for the next five years? The company’s weighted average cost of capital is 13.1% per year.
Answer:
$749.57
Explanation:
equivalent annual annuity = (NPV x rate) / [1 - (1 + rate)⁻ⁿ]
using a calculator, the NPV = $2,630rate = 13.1%n = 5equivalent annual annuity = ($2,630 x 0.131) / [1 - (1 + 0.131)⁻⁵] = $344.53 / 0.4596 = $749.57
The equivalent annual annuity is used to compare mutually exclusive projects and determine which yields the highest annual returns.
Xie Company identified the following activities, costs, and activity drivers for 2017. The company manufactures two types of go-karts: Deluxe and Basic.Activity Expected Costs Expected Activity Handling materials $625,000 100,000 parts Inspecting product 900,000 1,500 batches Processing purchase orders 105,000 700 orders Paying suppliers 175,000 500 invoices Insuring the factory 300,000 40,000 square feet Designing packaging 75,000 2 modelsAssume that the following information is available for the company’s two products for the first quarter of 2017.Production volume 10,000 units 30,000 unitsParts required 20,000 parts 30,000 partsBatches made 250 batches 100 batchesPurchase orders 50 orders 20 ordersInvoices 50 invoices 10 invoicesSpace occupied 10,000 sq. ft. 7,000 sq. ftModels 1 model 1 modelRequired:Compute activity rates for each activity and assign overhead costs to each product model using activity-based costing (ABC). What is the overhead cost per unit of each model?
Answer:
I can't understand this type of questions
Preference decisions compare potential projects that meet screening decision criteria and will be ranked in their preference order to differentiate between alternatives with respect to all of the following characteristics except:________a. importanceb. desirabilityc. feasibilityd. political prominence
Answer:
D
Explanation:
Political prominence inst determined in any of the capital budgeting methods. Also, political prominence shouldn't be a deciding factor when making an investment. a project might be politically prominent but it is unprofitable or doesn't align to the goals of the company.
Based on predicted production of 17,000 units, a company anticipates $255,000 of fixed costs and $216,750 of variable costs. The flexible budget amounts of fixed and variable costs for 15,000 units are (Do not round intermediate calculations):
Answer:
fixed costs = $255,000
variable costs = (15,000 / 17,000) x $216,750 = $191,250
Explanation:
A flexible budget is prepared in order to compare how budgeted revenues and costs actually worked out. In other words, if actual revenues and costs were similar to the budget previously prepared. A flexible budget adjusts actual results and helps management control how efficient the company was in following their budget. That is why a flexible budget is done after the budgeted period is over.
Fixed costs should not change (that is why they are fixed), but variable costs should change if the actual output was different than the budgeted output.
A customer has requested that Inga Corporation fill a special order for 3,000 units of product K81 for $30 a unit. While the product would be modified slightly for the special order, product K81's normal unit product cost is $21.30:
Direct materials $ 5.40
Direct labor 6.00
Variable manufacturing overhead 2.50
Fixed manufacturing overhead 7.40
Unit product cost $21.30
Direct labor is a variable cost. The special order would have no effect on the company's total fixed manufacturing overhead costs. The customer would like modifications made to product K81 that would increase the variable costs by $1.00 per unit and that would require an investment of $14,000 in special molds that would have no salvage value.
This special order would have no effect on the company's other sales. The company has ample spare capacity for producing the special order. If the special order is accepted, the company's overall net operating income would increase (decrease) by:______.
A. $14,200
B. $31,300
C. $(13,700)
D. $(2,800)
Answer:
B. $31,300
Explanation:
Sales $90,000
Less: Variable Cost $44,700
Less: Additional Fixed Cost $14,000
Increase in Operating Income $31,300
Workings:
Sales= 3,000 unit * $30
Sales= 90,000
Variable cost = 3,000 unit * (5.4 + 6 + 2.5 +1)
Variable cost = 3,000 * 14.9
Variable cost = $44,700
The Andrews Company has just purchased $55,736,000 of plant and equipment that has an estimated useful life of 15 years. The expected salvage value at the end of 15 years is $5,573,600. What will the book value of this purchase (exclude all other plant and equipment) be after its third year of use? (Use FASB GAAP)
Answer:
Book value = $45,703,520
Explanation:
We can calculate the book value of purchase after its third year of use by deducting all three years of depreciation from the cost of the asset.
DATA
Purchase cost = $55,736,000
Useful life = 15 years
Salvage value = $5,573,600
Solution
Book value = Cost - Accumulated depreciation
Book value = $55,736,000 - $10,032,480(w)
Book value = $45,703,520
Working
Depreciation per year = [tex]\frac{Cost-salvagevalue}{life}[/tex]
Depreciation per year = [tex]\frac{55,736,000-5,573,600}{15}[/tex]
Depreciation per year = $3,344,160
Depreciation for 3 years = $3,344,160 x 3
Depreciation for 3 years = $10,032,480
Three years accumulated depreciation for three years would be $10,032,480
The Baldwin company wants to decrease its plant utilization for Brat by 15%. How many units would need to be produced next year to meet this production goal
Answer:
1,266 units
Explanation:
A lot of information is missing, but I found a similar question:
current production level = 1,500 unitscurrent plant utilization rate = 96%total plant capacity = 1,500 / 96% = 1,562.5 units
if plant utilization will decrease by 15% ⇒ 96% - 15% = 81%
plant production to meet required production goal = 1,562.5 x 81% = 1,265.625 = 1,266 units
the fair value of Blossom is estimated to be $820,800. The carrying value of Blossom’s net identifiable assets, including the goodwill, at year-end is $855,000. Prepare Cullumber’s journal entry, if necessary, to record impairment of goodwill.
Answer:
Cullumber Company
Journal Entry:
Debit Loss on Goodwill Impairment $34,200
Credit Goodwill $34,200
To record the loss on goodwill impairment.
Explanation:
a) Data and Calculation:
Fair value = $820,800
Carrying value of net identifiable assets, including goodwill = $855,000
Goodwill impairment = $34,200 ($855,000 - $820,800)
b) Cullumber, which acquired Blossom is expected to check for the impairment of goodwill yearly. The impairment occurs when the carrying value of the net identifiable assets of Blossom is more than the fair value of Blossom. Generally Accepted Accounting Standards require the annual review of the fair value of goodwill to check for its impairment. By the above entry, the goodwill will be reduced by $34,200 and a loss debited in Cullumber's accounts.
A seller has accepted another offer, but your client doesn't want to give up. Even now, she can submit an offer to the seller, called a:
Answer: b. backup offer
Explanation:
A backup offer is one that is made when an offer has already been made by another. With a backup offer, the person offering it is acknowledging that someone else has made another offer that was accepted but they still offer this in case the accepted offer falls through for whatever reason.
If the seller accepts this offer, they will have a contract with the person offering that legally obliges them to sell the good in question to the person offering if the current offer is not honored.
A customer wishes to place an order to short 50,000 shares of ABC stock. The average daily trading volume (ADTV) in ABC stock is 40,000 shares. The representative:________.
A. should place the order
b. cannot place the order because the order size exceeds the ADTV.
c. should inform the client that the firm may not be able to borrow the stock.
d. sholud inform the client that the order can only be executed on an up-bid.
Answer:
c. should inform the client that the firm may not be able to borrow the stock.
Explanation:
Since it is mentioned that there is a short of 50,000 shares of ABC stock and the average daily trading volume is 40,000 shares that represent the trading of the stock is less i.e short
According to the SHO regulation, when the stock is sold has short than the dealer should track the shares i.e to be borrowed also find out the shares i.e to be delivered by the settlement by considering the documents
Now in this case, the shares i.e be borrowed find to be tougher also the tracking is not possible
Therefore the customer would not able to short the stock
What is the present value of a perpetuity that pays you annual, end-of-year payments of $950? Use a nominal rate (monthly compounding) of 7.50%.
Answer:
The present value of the perpetuity is $12,242.27.
Explanation:
A perpetuity is an annuity that provide cash flow for an infinite period .Examples are Non -redeemable Preference Share.
Present Value (perpetuity) = Payments ÷ Required Rate
But, first change the 7.50 % nominal rate to Annual Effective Rate to match the period of Cash flow.
Effective Rate = (1 + r / m)^m - 1
= ( 1 + 0.0750 / 12) ^12 -1
= 7.76%
Therefore, Present Value (perpetuity) = $950 ÷ 7.76%
= $12,242.27
At the certain interest rate, present value (PV) is the current value of a future sum of money or stream of cash flows.
The discount rate determines the present value of the cash flows, and the higher the discount rate, the lower the current value of future cash flows.
The present value of the perpetuity is $12,242.27.
A perpetuity is an annuity that payments out during an indefinite period of time. Non-redeemable Preference Share is an example.
Present Value (perpetuity) = [tex]\frac{\text{Payments}}{\text{Required Rate}}[/tex]
However, to match the Working capital period, change a 7.50 percent nominal rate to a Yearly Effective Tax rate.
[tex]\text{Effective Rate} = (1 + \frac{r}{m} )^m - 1= [1 + \frac{0.0750}{12}]^{12} -1= 7.76\%[/tex]
Therefore, Present Value (perpetuity)= [tex]\frac{\$950}{7.76\%} = $12,242.27[/tex]
To know more about the calculations of the present value, refer to the link below:
https://brainly.com/question/15036500
Window Dressing causes which kind of entry (may have more than one answer)? Multiple Choice Transaction Adjusting Closing
Answer:
Window Dressing causes Adjusting and Closing entries.
Explanation:
Window Dressing the alteration of financial performance near the year-end to appear as if performance has improved. To make the window dressing entry, some temporary and permanent accounts will be adjusted, especially Sales Revenue and costs to generate paper profits. These adjusting entries are closed to the Income Summary. The permanent accounts which are temporarily closed to the Balance Sheet for the period will also require some adjusting entries.
In your opinion, what are the forms of institutional advertising that are suitable for banks in Palestine with examples. Why??
Answer:
Institutional advertising for banks in Palestine should take into account the cultural sensibilities of the country.
As a muslim country, banks should take into account not only local Palestinian culture, but also general islamic culture when developing their advertising.
Palestine also has complex foreign relationships. Banks should also take this into account in order to create advertising that is effectively catered to the Palestinian people.
The company currently markets McDog T-bone, Lapdog Lunchtreats, Rover's Potroast, and Puppy Porterhouse in the dog food market. Prime Cuts will be an addition to the
Answer:
company's product line in the dog food market
Explanation:
In the description provided, it can be said that Prime Cuts will be an addition to the company's product line in the dog food market. A product line is a group of related products all marketed under a single brand name and are sold by the same company to the same targeted group of consumers. Such as in this scenario, all of the products listed are dog treats/food with different ingredients and are all sold by the same company to people looking for dog food.
In working on a bid for project you have determined that $245,000 of fixed assets will be required and that they will be depreciated straight-line to zero over the 5-year life of the project, and you can get $23,200 for these fixed assets at the end of 5 years. You will also need to increase net working capital by 15,000 initially and recoup the investment in net working capital at the end of the project. You have also determined that the discount rate should be 14 percent and the tax rate will be 35 percent. In addition, the annual cash costs will be $68,500. What is the minimum amount of annual sales revenue that is required for you to make money on the project? PLEASE SHOW WORK
A. $151,627.90
B. $155,119.00
C. $162,515.75
D. $102,627.90
E. $227,012.50
Assume BGL Enterprises increases its operating efficiency by lowering its costs while holding its sales constant. As a result, given all else constant, the: A. return on assets will decrease.
B. profit margin will decline.
C. equity multiplier will decrease.
D. return on equity will increase.
E. price-earnings ratio will increase.
Answer:
Question 1:
required investment $245,000
depreciation expense per year = ($245,00 - $23,200) / 5 = $44,360
you will also require $15,000 in working capital
annual cash costs = $68,500
what is the minimum amount of cash sales for accepting the project:
net cash flow₁ = {[(sales revenue - $68,500 - $44,360) x 0.65] + $44,360} / 1.14 = (0.65SR - $28,999) / 1.14 = 0.5702SR - $25,437.72
net cash flow₂ = {[(sales revenue - $68,500 - $44,360) x 0.65] + $44,360} / 1.14² = (0.65SR - $28,999) / 1.14² = 0.5002SR - $22,313.79
net cash flow₃ = {[(sales revenue - $68,500 - $44,360) x 0.65] + $44,360} / 1.14³ = (0.65SR - $28,999) / 1.14³ = 0.4387SR - $19,573.50
net cash flow₄ = {[(sales revenue - $68,500 - $44,360) x 0.65] + $44,360} / 1.14⁴ = (0.65SR - $28,999) / 1.14⁴ = 0.3849SR - $17,169.74
net cash flow₅ = {[(sales revenue - $68,500 - $44,360) x 0.65] + $44,360 + $15,000} / 1.14⁵ = (0.65SR - $13,999) / 1.14⁵ = 0.3376SR - $7,270.64
NPV = -initial outlay + cash flows
NPV = 0
initial outlay = cash flows
$260,000 = 0.5702SR - $25,437.72 + 0.5002SR - $22,313.79 + 0.4387SR - $19,573.50 + 0.3849SR - $17,169.74 + 0.3376SR - $7,270.64
$260,000 = 2.2316SR - $91,765.39
$351,765.39 = 2.2316SR
sales revenue = $351,765.39 / 2.2316 = $157,629.23
the closest answer is B = $155,119, but its NPV will be negative.
so we have to select C = $162,515.75 that results in an NPV = $10,887.
Question 2:
The correct answer is D. return on equity will increase.
If you lower your costs while your sales remain the same, your profits will increase as well as your ROE.
All of the following are considered process innovation EXCEPT A. organizational innovation. B. nonneutral technical progress. C. neutral technical progress. D. labor saving technical progress.
Answer:
B. nonneutral technical progress.
Explanation:
Seminole Corporation common stock currently sells for $32 per share. The firm recently paid a dividend of $1.25 per share. Flotation costs for new external equity are $3 per share. Analysts have forecast that earnings and dividends will grow at an average annual rate of 7% percent well into the future. What is the company's cost of internal equity?
Answer:
The cost of internal equity is 11.18%
Explanation:
The constant growth model of DDM can be used to calculate the price of a stock if the growth rate in the dividend is expected to remain constant. The DDM values the stock based on the present value of the expected future dividends from the stock.
The formula for price today under DDM is,
P0 = D0 * (1+g) / r - g
We already know the P0, the D0 and the g. We can plug in these values in the formula to calculate r which is the cost of equity capital.
32 = 1.25 * (1+ 0.07) / (r - 0.07)
32 * (r - 0.07) = 1.3375
32r - 2.24 = 1.3375
32r = 1.3375 + 2.24
r = 3.5775 / 32
r = 0.11179 or 11.179%
