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##### A stock currently pays a \$4 dividend. This dividend is expected-(Answered)

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Question

• A stock currently pays a \$4 dividend. This dividend is expected to grow by \$1 per year for three years, and then grow at a rate of 3% per year thereafter. If your required rate of return is 12%, what is the current value of the stock?

1. A bond has a coupon of 8.5%, paid on a semi-annual basis. The par value is \$1000, and the bond matures in 20 years. If your required rate of return is 10%, what is the current value of the bond?

A preferred stock currently pays a \$3 annual dividend, and has a par value of \$40. Your required rate is 9%. The dividend is paid on a semiannual basis. What is the current value of the preferred stock?Chuck?s Beer Distributing is considering changing its credit policy from ?net 45? to ?2/20, net 45?. The firm expects its average collection period to decrease by 12 days, and 40% of its customers to take the cash discount. Chuck?s current credit sales of \$40 million are not expected to change if the firm offers the cash discount. The firm?s bad-debt loss ratio is expected to remain at 4% if it adopts the credit terms. Chuck?s variable cost ratio is 70%, and it is able to invest at a rate of 16%. The firm does not expect its inventory level to change as a result of its proposed change in credit terms.

Compute the funds released by the change in credit terms.

Compute the net impact the change in credit terms has on Chuck?s pre-tax profits.

1. Kevin?s Supply has a reputation with its competitors and customers as the firm with the toughest credit standards in the industry. Kevin?s high credit standards have resulted in the firm requiring cash on delivery from about 40% of its potential customers. Because of these high standards, many of the potential customers decide to deal with other suppliers who are more lenient in granting credit. Kevin?s has just hired a new CEO who has decided to challenge the firm?s existing credit standards. She estimates that by granting credit to the average risk customers, sales will increase by \$4.8 million. The CEO expects 25% of the new credit customers to take advantage of Kevin?s 2% discount, and 5% of the new sales to become bad-debt losses. The average collection period for this category of customers is expected to be 51 days. The CEO estimates that an additional inventory investment of \$1 million will be necessary due to the expected sales increase. The CEO has stipulated that any investment in current assets provide a 14% pre-tax return. If the firm?s variable cost ratio is 85%, should the average risk customers be extended credit?

1. A stock currently pays a \$4 dividend. This dividend is expected to grow by \$1 per year for three

years, and then grow at a rate of 3% per year thereafter. If your required rate of return is 12%,

what is the current value of the stock?

2. A bond has a coupon of 8.5%, paid on a semi-annual basis. The par value is \$1000, and the bond

matures in 20 years. If your required rate of return is 10%, what is the current value of the bond?

3. A preferred stock currently pays a \$3 annual dividend, and has a par value of \$40. Your required

rate is 9%. The dividend is paid on a semiannual basis. What is the current value of the preferred

stock?

4. Chuck?s Beer Distributing is considering changing its credit policy from ?net 45? to ?2/20, net

45?. The firm expects its average collection period to decrease by 12 days, and 40% of its

customers to take the cash discount. Chuck?s current credit sales of \$40 million are not expected

to change if the firm offers the cash discount. The firm?s bad-debt loss ratio is expected to remain

at 4% if it adopts the credit terms. Chuck?s variable cost ratio is 70%, and it is able to invest at a

rate of 16%. The firm does not expect its inventory level to change as a result of its proposed

change in credit terms.

a.

Compute the funds released by the change in credit terms.

b. Compute the net impact the change in credit terms has on Chuck?s pre-tax profits.

5. Kevin?s Supply has a reputation with its competitors and customers as the firm with the toughest

credit standards in the industry. Kevin?s high credit standards have resulted in the firm requiring

cash on delivery from about 40% of its potential customers. Because of these high standards,

many of the potential customers decide to deal with other suppliers who are more lenient in

granting credit. Kevin?s has just hired a new CEO who has decided to challenge the firm?s

existing credit standards. She estimates that by granting credit to the average risk customers,

sales will increase by \$4.8 million. The CEO expects 25% of the new credit customers to take

advantage of Kevin?s 2% discount, and 5% of the new sales to become bad-debt losses. The

average collection period for this category of customers is expected to be 51 days. The CEO

estimates that an additional inventory investment of \$1 million will be necessary due to the

expected sales increase. The CEO has stipulated that any investment in current assets provide a

14% pre-tax return. If the firm?s variable cost ratio is 85%, should the average risk customers be

extended credit?

Paper#9210190 | Written in 27-Jul-2016

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