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Author Question: Consider a two-year investment: Given a constant and positive interest rate, the interest earned in ... (Read 211 times)

Jkov05

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on: Jul 10, 2018
Consider a two-year investment: Given a constant and positive interest rate, the interest earned in the second year will be greater than the interest earned in the first year (assuming annual compounding).
 
  Indicate whether the statement is true or false.

Question 2

In response to the stock market's reaction to its dividend policy, the Nico's Toy Company has decided to increase its dividend payment at a rate of 4 percent per year.
 
  The firm's most recent dividend is 3.25 and the required rate of interest is 9 percent. What is the maximum you would be willing to pay for a share of the stock?


alvinum

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Reply #1 on: Jul 10, 2018
Answer to Question 1

Answer: TRUE
Explanation: The second year earns interest on the first year interest as well as interest on the principal.

Answer to Question 2

P = D1 / (r - g) = 3.25  (1 + 0.04 ) / (0.09 - 0.04 ) = 67.60


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Jkov05

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Reply #2 on: Jul 10, 2018
Correct answers!


alvinum

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Reply #3 on: Jul 10, 2018
Great! Please up vote :D


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