Explanation:
Journal entries
Books of (----- LTD)
Particular Amount Amount
Purchase A/c Debit 20,000
Cash A/c Credit 12,000
Creditor A/c Credit 8,000
(Being goods purchase on cash and credit)
Which of the following statements is incorrect regarding the process of building a company's brand, particularly for young firms?
a. A firm's name, logo, Web site design, and even its letterhead are part of its brand.
b. One of the keys to effective branding is to create a strong personality for a firm.
c. Some companies monitor the integrity of their brands through brand management.
d. Startups must build a brand from scratch, which starts with selecting the company's name.
e. Most experts recommend a heavy reliance on advertising in building a firm's brand.
Answer: e. Most experts recommend a heavy reliance on advertising in building a firm's brand.
Explanation:
There are many ways to build a brand and while advertising is one of them, it is not the major one and experts would not recommend that a heavy reliance is placed on it.
Rather a brand can be built by instituting a robust brand management system to ensure that the brand grows through actions that show integrity and personality that will attract people to the brand regardless of if it is being advertised or not.
O'Garro Inc. has paid a regular quarterly cash dividend of $0.70 per share for several years. The common stock is publicly traded. On February 21 of the current year, O'Garro’s board of directors declared the regular first-quarter dividend of $0.70 per share payable on March 30 to stockholders of record on March 15.
Required:
As a result of this dividend action, state what you would expect to happen to the market price of the common stock of O’Garro, Inc., on each of the following dates. Explain your answers.
a. February 21.
b. March 13.
c. March 15.
d. March 30.
Answer:
A.) February 21st
For the first quarter, this date is the date of declaration. In earlier years, this same dividend is what is paid. The price of the stock would not be affected too much by this.
B. March 13th
This is a date for ex dividend. The price in the stock market could fall by the same amount of the dividend.
C. March 15th
This date is the record date. The price cannot be influenced given that any stock that is traded in public is usually affected by the date of the ex dividend.
D. March 30tg
This date is the payment date. Liability is paid only as dividends payable.
For the following purchasing and sales transactions, prepare the appropriate journal entry assuming a perpetual inventory system is in place.
1. On January 1, Cougar Corp. purchased inventory from a supplier for $7,000. The credit terms on the transaction are 1 /10, net 30.
2. On January 2, Cougar Corp. paid a shipping company $150 for freight associated with the January 1 purchase.
3. On January 5, Cougar Corp sold inventory with a cost of $2,400 for $4,100. The credit terms on the transaction are 3/15, net 30.
4. On January 6, Cougar Corp. returned $800 of the inventory purchased on January 1.
5. On January 7, Cougar Corp. paid $240 to ship the goods sold on January 5.
6. On January 9, Cougar Corp. paid for the purchase on January 1. (Don't forget to consider the purchase return on January 6).
7. On January 10, Cougar Corp. received payment for the sale made on January 5.
Answer:
Cougar Corp.
Journal Entries:
1. January 1, Debit Inventory $7,000
Credit Accounts Payable $7,000
To record the purchase of goods on terms 1 /10, net 30.
2. January 2, Debit Freight-in $150
Credit Cash $150
To record the payment for freight-in.
3. January 5, Debit Cost of goods sold $2,400
Credit Inventory $2,400
To record the cost of goods sold.
Debit Accounts Receivable $4,100
Credit Sales Revenue $4,100
To record the sale of goods on account, terms 3/15, net 30.
4. January 6, Debit Accounts Payable $800
Credit Inventory $800
To record the return of goods on account.
5. January 7, Debit Freight-out $240
Credit Cash $240
To record the payment of freight-out.
6. January 9, Debit Accounts Payable $6,200
Credit Cash $6,138
Credit Cash Discounts $62
To record the payment on account, including cash discounts
7. January 10 DebitCash $3,977
Debit Cash Discounts $123
Credit Accounts Receivable $4,100
To record the receipt of cash, including cash discounts.
Explanation:
a) Data and Analysis:
1. January 1, Inventory $7,000 Accounts Payable $7,000
terms 1 /10, net 30.
2. January 2, Freight-in $150 Cash $150
3. January 5, Cost of goods sold $2,400 Inventory $2,400
Accounts Receivable $4,100 Sales Revenue $4,100
terms 3/15, net 30.
4. January 6, Accounts Payable $800 Inventory $800
5. January 7, Freight-out $240 Cash $240
6. Accounts Payable $6,200 Cash $6,138 Cash Discounts $62
7. Cash $3,977 Cash Discounts $123 Accounts Receivable $4,100
ABC and XYZ are all-equity firms. ABC has 1,750 shares outstanding at a market price of $20 a share while XYZ has 2,500 shares outstanding at a price of $28 a share. ABC is acquiring XYZ for $75,000 in cash. The incremental value of the acquisition is $8,000. What is the net present value of acquiring XYZ to ABC
Answer:
the net present value is -$32,000
Explanation:
The computation of the net present value is shown below;
= (Number of oustanding shares × market price per share) + incremental value of acquisition - acquiring value in cash
= (1,750 × $20) + $8,000 - $75,000
= $43,000 - $75,000
= -$32,000
Hence, the net present value is -$32,000
XYZ segmented last year's income statement into its ten product lines. The CEO is curious as to what effect dropping one product line at the beginning of last year would have had on overall company profit. What is the best number to look at to determine the effect of this elimination on the net operating income of the company as a whole?
A) the product line's sales dollars.
B) the product line's contribution margin.
C) the product line's segment margin.
D) the product line's segment margin minus an allocated portion of common fixed expenses.
Answer:
Option c: The product line's segment margin
Explanation:
Net Operating Income
This is often regarded as the
adjusted Effective Gross Income (EGI) adjusted for annual operating expense and capital expenditures of a firm/organization
Net Operating Income Equation
(sales - variable expenses) - fixed expenses
Segment margin
The product line segment margin is usually said to be obtainable through the act of deduction of the traceable fixed costs of a segment from the segment's contribution margin. It shows or entails the margin at hand after a segment has covered all of its own costs. Itis the best gauge of the long-run profitability of a segment as it includes only those costs that are caused by the segment.
Segment margin formula
Contribution Margin - Traceable fixed costs
Laura's Pizza Place incurs $800,000 per year in explicit costs and $100,000 in implicit costs. The restaurant earns $1.3 million in revenues. Based on this information, what is accounting profit for Laura's Pizza Place
Answer:
$500,000
Explanation:
Fill inthe blanks.
a. Fiscal Policy involves changing __________ . In the United States, Fiscal Policy is implemented by the _________.
b. ____________can be used to address a Recessionary Gap by __________ taxes and _________ government purchases. Meanwhile, ___________can be used to address an Inflationary Gap by ________ taxes and __________government purchases.
Answer:
a) taxes and government spending, President and Congress
b) Expansionary Fiscal Policy, lowering, raising, Contractionary Fiscal Policy, raising, lowering.
Explanation:
a. Fiscal Policy involves changing taxes and government spending. In the United States, Fiscal Policy is implemented by the President and Congress.
b. Expansionary Fiscal Policy can be used to address a Recessionary Gap by lowering taxes and raising government purchases. Meanwhile, Contractionary Fiscal Policy can be used to address an Inflationary Gap by raising taxes and lowering government purchases.
Indicate whether each transaction is an operating activity, investing activity, financing activity, or noncash investing and financing activity.
(a) Issued $50,000 par value common stock for cash.
(b) Purchased a machine for $30,000, giving a long-term note in exchange.
(c) Issued $200,000 par value common stock upon conversion of bonds having a face value of $200,000.
(d) Declared and paid a cash dividend of $13,000.(e) Sold a long-term investment with a cost of $15,000 for $15,000 cash.
(f) Collected $16,000 from sale of goods.(g) Paid $18,000 to suppliers.
Answer:
A. Financing activities
B. Noncash investing and financing activities
C. Noncash investing and financing activities
D. Financing activities
E. Investing Activities
F. Operating Activities
G. Operating Activities
Explanation:
To Indicate whether each transaction is an OPERATING ACTIVITY, INVESTING ACTIVITY, FINANCING ACTIVITY, or NONCASH INVESTING and FINANCING ACTIVITY.
A. Based on the information given the transaction is a FINANCING ACTIVITIES
B. Based on the information given the transaction is a NONCASH INVESTING and FINANCING ACTIVITIES
C. Based on the information given the transaction is a NONCASH INVESTING and FINANCING ACTIVITIES
D. Based on the information given the transaction is a FINANCING ACTIVITIES
E.Based on the information given the transaction is a INVESTING ACTIVITIES
F.Based on the information given the transaction is an OPERATING ACTIVITIES
G. Based on the information given the transaction is an OPERATING ACTIVITIES
The multiplier effect of changes in government transfers is: greater than the multiplier effect of a change in government spending. impossible to determine. less than the multiplier effect of a change in government spending. zero because transfer payments do not affect aggregate demand.
Answer: less than the multiplier effect of a change in government spending.
Explanation:
The multiplier effect of government transfers refers to the measure by which the aggregate demand will increase by as a result of government transfers increasing.
This multiplier is less than the multiplier effect of a change in government spending. This is because government spending affects more people in the economy as it targets both companies and consumers. Government transfers on the other hand, target only welfare and unemployment payments amongst others so it cannot have the same effect as government spending.
The following selected transactions apply to Topeca Supply for November and December Year 1. November was the first month of operations. Sales tax is collected at the time of sale but is not paid to the state sales tax agency until the following month.
a. Cash sales for November Year 1 were $65,500 plus sales tax of 9 percent.
b. Topeca Supply paid the November sales tax to the state agency on December 10, Year 1.
c. Cash sales for December Year 1 were $79,500 plus sales tax of 9 percent.
Required:
Record the effect of the given transactions in a horizontal statements model.
Answer:
Note: See attached excel file for the record of the effect of the given transactions in a horizontal statements model.
In the attached excel file, we have:
Assets = Liabilities + Stockholders' Equity = $152,155
Explanation:
In the attached excel file, we have:
Sales tax payable on sales for November Year 1 = $65,500 * 9% = $5,895
Sales tax payable on sales for December Year 1 = $79,500 * 9% = $7,155
Assets = $152,155
Liabilities + Stockholders' Equity = $7,155 + $145,000 = $152,155
Therefore, the accounting equation is proved as follows:
Assets = Liabilities + Stockholders' Equity = $152,155
Dog Kennel uses tenant-days as its measure of activity; an animal housed in the kennel for one day is counted as one tenant-day. During March, the kennel budgeted for 3,100 tenant-days, but its actual level of activity was 3,120 tenant-days. The kennel has provided the following data concerning the formulas used in its budgeting and its actual results for March: Data used in budgeting: Fixed element per month Variable element per tenant-day Revenue - $ 34.00 Wages and salaries $ 2,000 $ 7.00 Food and supplies 1,000 13.50 Facility expenses 7,500 2.50 Administrative expenses 6,000 0.10 Total expenses $ 16,500 $ 23.10 Actual results for March: Revenue $ 104,372 Wages and salaries $ 28,500 Food and supplies $ 44,025 Facility expenses $ 14,900 Administrative expenses $ 7,090 The revenue variance for March would be closest to: Multiple Choice $1,708 F $1,708 U $1,028 U $1,028 F
Answer:
Dog Kennel
The revenue variance for March would be closest to:
= $1,028 U
Explanation:
a) Data and Calculations:
Budgeted kennel tenant-days = 3,100
Actual kennel tenant-days = 3,120
Fixed element Variable element Total
per month per tenant-day
Revenue - $ 34.00 $105,400
Wages and salaries $ 2,000 $ 7.00 $23,700
Food and supplies 1,000 13.50 42,850
Facility expenses 7,500 2.50 15,250
Administrative expenses 6,000 0.10 6,310
Total expenses $ 16,500 $ 23.10 $88,110
Actual results for March:
Revenue $ 104,372
Wages and salaries $ 28,500
Food and supplies $ 44,025
Facility expenses $ 14,900
Administrative expenses $ 7,090
Total expenses $94,515
Revenue variance for March would be closest to: $1,028 U ($105,400 - $104,372)
The group of people within an organization who participate in the buying process and share common goals, risks, and knowledge important to a purchase decision are referred to as the
Answer:
Buying center
Explanation:
The group of an people in an organization that participated for purchasing the process and at the same time they share the common goals, objectives, risk and knowledge that are crucial for making a purchasing decision we called it as the buying center. In this the unit of the decision making of an organziation contacted to the members for making the buying decision process of the firm
So the above should be the answer
Segway focuses on the personal people-mover market of individuals who need to move longer distances with ease. Its stand-up scooter is used in two narrow markets: tourist tours and warehouse employee movement. What type of marketing strategy should this company use
Answer:
The correct answer is "Differentiated marketing".
Explanation:
A marketing approach involving the promotion of a manufacturer portfolio which transfers from one sector of the economy would be known as Differentiated marketing.That alone contributes to better awareness, to a greater audience, towards consumer requirements including more revenues.Thus the above is the correct answer.
A 4 year maturity bond with a 14% coupon rate can bought for $1200. i- What is the yield to maturity if the coupon is paid annually? (4) ii- What if it is paid semiannually?
Answer:a
Explanation:b
Darnell has saved $30 per week to buy a new Blu-ray player. He compares two different models: a Panaview that is priced at $130 and a Zony model that is priced at $140. Darnell decides to purchase the Zony Blu-ray player for $140. Identify what role money plays in each of the following parts of the story.
a. Alex can easily determine that the Panaview model has a lower price than the Zony Model.
b. Alex saved $30 per week.
c. Alex pays $140 for the Blu-Ray player.
Answer:
unit of account
store of value
medium of exchange
Explanation:
Money is anything that is generally accepted as a means of payment for goods and services and for repayment of debt.
Functions of money
1. Medium of exchange : money can be used to exchange for goods and services. For example, money serves as a medium of exchange when you pay $140 for the Blu-Ray player.
2. Unit of account : money can be used to value goods and services, For example, you can determine that the value of the Panaview model is lower than the Zony Model based on its price
3. Store of value : money can retain its value over the long term, this it can be used as a store of value.
What are the three vital functions that money performs? Which of the following items perform some but not all of these functions, and which perform all of these functions? Which of the items are money? a. A credit card b. A checking account at the Bank of America c. A $ 10 bill d. Upper A diamond ring e. Plastic sheets used to make Visa cards f. Ancient Roman coins g. GM bonds
Answer:
The answer is below
Explanation:
The three vital functions that money performs are the following
1. i) medium of exchange,
ii) unit of account
iii) store of value
2. Items "B (A checking account at the Bank of America)" perform all of these functions and are money.
Items "A. (A credit card)
B. (A checking account at the Bank of America)
D. (A Upper A diamond ring)
E. (Plastic sheets used to make Visa cards, )
F. (Ancient Roman coins)
G. (GM bonds) perform some of these functions and are not money.
William took out a $440,000 mortgage to purchase his personal residence. The residence is worth almost $1 million, and William wants to take out a $200,000 second mortgage and use the proceeds to consolidate his credit card debt. William can deduct the interest he pays on both mortgages.
a. True
b. False
Answer:
false
Explanation:
this is false than
If the best surgeon in town is also the best at cleaning swimming pools, then according to the theory of comparative advantage, this person should split his time evenly between being a surgeon and cleaning swimming pools. pursue the activity he enjoys more. specialize in being a surgeon because its opportunity cost is lower. specialize in cleaning swimming pools because it is more labor-intensive.
Answer:
tspecialize in being a surgeon because its opportunity cost is lower
Explanation:
A person has comparative advantage in production if it produces at a lower opportunity cost when compared to other people.
Implicit cost is the cost of the next best option forgone when one alternative is chosen over other alternatives
What the surgeon would give up to pratice as a surgeon would be lower compared than if he decided to specialise in cleaning pools
thus he should specialize in being a surgeon because its opportunity cost is lower
Amy and Bill are fixing up their house by painting walls and installing electrical outlets. In one hour, Amy can paint 8 walls, or install 6 outlets. In one hour, Bill can paint 5 walls, or install 5 outlets
Required:
a. If Amy painted 8 walls in the first hour of work, and then switched to doing 6 outlets in the second hour of work, what was the opportunity cost of each of those outlets?
b. If Bill painted 5 walls in the first hour of work, and then switched to doing 5 outlets in the second hour of work, what was the opportunity cost of each of those outlets?
Answer:
1.33 walls
1 wall
Explanation:
Tradeoff is the opportunity cost of taking a particular decision
Opportunity cost of the next best option forgone when one alternative is chosen over other alternatives
My doing he outlet, the opportunity to paint is forgone
Amy = 8/6 = 1.33
Bill = 5/5
Jefferson tutoring had the following payroll information on Feb 28:
Gross pay: 4,000
Cumulative earnings prior to this payroll: 4,000
Assume:
FICA tax rates are OASDI 6.2% on a limit of 117,000 and medicare 1.45%.
State unemployment tax rate is 2% on the first 7,000.
Federal unemployment tax rate is 0.8% on the first 7,000
Using the information above the journal entry to record the payroll tax expense for jefferson tutoring would include:____.
A. a credit to FUTA payable for 24.
B. a debit to payroll tax expense in the amount of 390.
C. a credit to SUTA payable for 60.
D. all of the above.
Answer: D. all of the above.
Explanation:
FUTA:
Cumulative earnings were $4,000. FUTA is one the first $7,000 which means that only $3,000 is left to be taxed on account of the cumulative earnings prior to this payroll having been taxed:
= 0.8% * 3,000
= $24
This will be credited to FUTA Payable to recognize that Jefferson owes this liability.
SUTA:
Same goes for SUTA:
= 2% * 3,000
= $60
This will be credited to SUTA Payable to recognize that Jefferson owes this liability.
Payroll tax expense:
= FICA taxes + Medicare + FUTA + SUTA
= ((6.2% + 1.45%) * 4,000) + 24 + 60
= $390
This will be debited to Payroll Tax expense because expenses are debited when they increase.
Select the true statement about the Restatement of the Law of Contracts.
a. It is a valuable resource for judges to consult, but it is not formal law.
b. It is the primary source of law for contract cases involving the sale of goods.
c. It must be renewed by Congress every ten years.
d. It completely overturned the contract law that had developed in the common law courtroom.
Answer:
The TRUE statement about the Restatement of the Law of Contracts is:
a. It is a valuable resource for judges to consult, but it is not formal law.
Explanation:
The Restatement of the Law of Contracts are treatises that clarify the general principles of contract common law, to help judges and lawyers in their judgments. Though it is one of the best-recognized and frequently cited legal treatises in all of American jurisprudence, it remains secondary sources of law. With the cooperation of judges, legal professors, and other legal experts, it is written and published by the American Law Institute (ALI).
Charles Chadwick opened a business called Charlie's Detective Service in January 2019. At the end of January the accounts had the following balances:
Prepare a trial balance for Charlie's Detective Service as of January 31, 2019.
Accounts Payable $4,000
Accounts Receivable $3,000
Cash $24,400
Charles Chadwick, Capital $30,000
Charles Chadwick, Drawing $3,000
Computer Equipment $8,000
Office Furniture $5,000
Office Supplies $300
Professional Fees $12,000
Rent Expense $1,500
Utilities Expense $800
Answer:
Please find the complete solution in the attached file.
Explanation:
On January 1, 2019, Loeffler Company acquired a machine at a cost of $200,000. Loeffler estimates that it will use the machine for 4 years or 8,000 machine hours. It estimates that after 4 years the machine can be sold for $20,000. Loeffler uses the machine for 2,100 and 1,800 machine hours in 2019 and 2020, respectively.
Required:
Compute depreciation expense for 2019 and 2020 using the () straight-line, (2) double- declining-balance, and (3) units-of-production methods of depreciation
Answer:
1. $45,000
$45,000
2. $100,000
$50,000
3. $47250
$40,500
Explanation:
Straight line depreciation expense = (Cost of asset - Salvage value) / useful life
($200,000 - $20,000) / 4 = $45,000
Depreciation expense each year would be $45,000
Depreciation expense using the double declining method = Depreciation factor x cost of the asset
Depreciation factor = 2 x (1/useful life) = 2/4 = 1/2
Depreciation expense in 2019 = 1/2 x 200,000 = $100,000
Book value in 2020 = 200,0000 - 100,000 = 100,000
Depreciation expense in 2019 = 1/2 x 100,000 = 50,000
Activity method based on hours worked = (hours worked that year / total hours of the machine) x (Cost of asset - Salvage value)
2019 = ($200,000 - $20,000) x ( 2,100 / 8000) = 47250
2020 = ($200,000 - $20,000) x ( 1800 / 8000) = 40,500
Dristell Inc. had the following activities during the year (all transactions are for cash unless stated otherwise):
A building with a book value of $400,000 was sold for $500,000.
Additional common stock was issued for $160,000.
Dristell purchased its own common stock as treasury stock at a cost of $75,000.
Land was acquired by issuing a 6%, 10-year, $750,000 note payable to the seller.
A dividend of $40,000 was paid to shareholders.
An investment in Fleet Corp.’s common stock was made for $120,000.
New equipment was purchased for $65,000.
A $90,000 note payable issued three years ago was paid in full.
A loan for $100,000 was made to one of Dristell’s suppliers. The supplier plans to repay Dristell this amount plus 10% interest within 18 months.
Answer:
Net cash flows from financing activities = (45000)
Explanation:
Common stock issued 160000
Treasury stock purchased (75000)
Dividends paid (40000)
Note payable repaid (90000)
Net cash flows from financing activities
(45000)
Given the following, the standard cost of this item is $_____per unit.
Direct materials per unit: 2 pounds
Direct material cost: $2.50 per pound
Direct labor per unit: .75 hours
Direct labor rate: $16.00 per hour
Variable overhead rate: $8.00 per hour
Answer:
$23 per unit
Explanation:
Standard cost = Direct materials + Direct labor + Variable overhead
Standard cost = (2 pounds*$2.50 per pound) + (0.75 hours*$16.00 per hour) + (0.75 hours*$8.00 per hour)
Standard cost = $5 + $12 + $6
Standard cost = $23
So, the standard cost of this item is $23 per unit.
California wildfires destroy vineyards across the Napa Valley. This is during the season when wine festivals occur most often all over the country. Demonstrate the effect of these events on the equilibrium price and quantity of wine.
Answer:
As a result of the wildfire, supply would fall. there would be a leftward shift of the supply curve. the quantity supplied of wine would reduce and price would increase
as a result of the festival, there would be an increase in demand. this would lead to an outward shift of the demand curve. Thus, the quantity demanded would increase and price would increase
taking these two effects together, there would be an indeterminate change in equilibrium quantity and equilibrium price would increase
Explanation:
Leona, whose marginal tax rate on ordinary income is 37 percent, owns 100 percent of the stock of Henley Corporation. This year, Henley generates $1 million of taxable income.
If Henley wants to pay all of its after-tax earnings to Leona as a dividend, calculate the amount of the dividend payment.
Calculate Leona’s tax due on the dividend computed in part a, and her after-tax cash flow from the dividend receipt.
Compute the combined corporate and individual tax burden on Henley’s $1 million of current year income, and the effective combined tax rate on this income.
Answer: See explanation
Explanation:
First and foremost, it should be noted that there's a flat tax rate of 21% on the taxable income, therefore the after tax income will be:
= (1 - 21%) × $1 million
= 79% × $1 million
= $790,000
Therefore, the amount of the dividend payment is $790,000 which is given to Leona.
The after tax cash flow from the dividend receipt will be:
= $790,000 - (20% × $790,000)
= $790,000 - (0.2 × $790,000)
= $790,000 - $158,000
= $632,000
Therefore, the total tax by Henly and Leona will then be:
= $210,000 + $158,000
= $368,000.
This is 36.8% (368000/1 million) of the tax rate.
Why does the Aggregate Demand Curve slope downwards?
a. GDP Effect
b. Exchange-RMC Effect
c. Turn-Rate Effect
d. Substitution Effect
e. Interest-Rate Effect
f. Marginal Effect
g. Wealth Effect
Answer:
b. Exchange - RMC Effect c. Interest-Rate effect d. Wealth effectExplanation:
When the exchange rate of the country falls, goods denominated in that currency will become cheaper and this would have the effect of making exports cheaper. Exports therefore rise with lower price levels.
A lower interest rate will mean that more companies will take loans to invest. Investment is a component of Aggregate demand so when investment increases, so does AD.
When prices are lower in the economy, the Aggregate Demand will increase because people will be able to afford more goods and services. This is the wealth effect.
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Computech Corporation is expanding rapidly and currently needs to retain all of its earnings; hence, it does not pay dividends. However, investors expect Computech to begin paying dividends, beginning with a dividend of $0.50 coming 3 years from today. The dividend should grow rapidly - at a rate of 49% per year - during Years 4 and 5; but after Year 5, growth should be a constant 9% per year. If the required return on Computech is 16%, what is the value of the stock today? Round your answer to the nearest cent. Do not round your intermediate calculations.
Answer: $8.81
Explanation:
To solve this, add the present values of the dividends from years 3, 4 and 5 and then add the present value of the terminal value of the stock at year 5.
Year 3 dividend = $0.50
Year 4 dividend = 0.50 * (1 + 49%) = $0.745
Year 5 dividend = 0.745 * 1.49 = $1.11005
= Dividend in year 3 / (1 + required rate of return)³ + Dividend in year 4 / (1 + required rate of return)⁴ + Dividend in year 5 / (1 + required rate of return)⁵ + (Dividend in year 5 * (1 + growth rate) / ( required rate of return - growth rate ) ) / (1 + required rate of return)⁵
= 0.5 / 1.16³ + 0.745/1.16⁴ + 1.11005/1.16⁵ + ( 1.11005 / (16% - 9%)) / 1.16⁵
= $8.81
If the required return on Compu tech is 16%, the value of stock today is $8.81. To answer this, sum the present values of the dividends from years 3, 4, and 5, followed by the present value of the stock's terminal value in year 5.
The current value of a future sum of money or stream of cash flows at a predetermined rate of return is known as its present value (PV). The present value of future cash flows is reduced by the discount rate, and the higher the discount rate, the lower the present value of future cash flows.
Given,
Year 3 dividend = $0.50
Year 4 dividend = 0.50 * (1 + 49%) = $0.745
Year 5 dividend = 0.745 * 1.49 = $1.11005
Dividend in year 3 / (1 + required rate of return)³ + Dividend in year 4 / (1 + required rate of return)⁴ + Dividend in year 5 / (1 + required rate of return)⁵ + (Dividend in year 5 * (1 + growth rate) / ( required rate of return - growth rate ) ) / (1 + required rate of return)⁵
= 0.5 / 1.16³ + 0.745/1.16⁴ + 1.11005/1.16⁵ + ( 1.11005 / (16% - 9%)) / 1.16⁵
= $8.81
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