Question

4. Determine the expected price of Verizon's stock next year using the dividend discount model and the internal growth rate. 10 points 5. A couple buys a $200,000 home with 10% down and a 30 year loan with a monthly payment of $808.28. Calculate the annual rate. 5 points After one year they increase their monthly payment by $100, how much do they owe on the loan one year later (24 months from when the loan was originally made)? 10 points They sell the house after the second year for $214,000, what was the monthly return? 10 points

Answer 1

Question no 4

Expected value of Stock = Dividend 1 / (Return on Equity - Growth)

Return on Equity = Net Income / Equity

Equity = Assets - Total Debts

Return on Assets = Net Income / Total Assets (Return on Asset is Given)

7.21% = 0.0721 = 16.1 / Total Assets

Total Assets = 16.01 / 0.0721 = 223.30 billion (Rounded off to 2)

Total Equity = 223.30 - 132 = 91.30

Return on Equity = 16.1 / 91.30 = 17.63% (Rounded off to 2)

Dividend Per Share = 2.16

Internal Growth Rate = Retention Ratio * ROA  

Retention Ratio = (1 - Dividend Pay Out Ratio)

Dividend Pay Out Ratio = Dividend Per Share / EPS = 2.46/ 3.89 = 0.6324

Retention Ratio = (1 -0.6324) = 0.3676

Internal Growth Rate = 0.3676 * 0.0721 = 0.02650396 = 2.65% (Rounded off to 2)

Expected value of Stock = 2.46*1.0265 / (0.1763 - 0.0265) = $16.86