9. OPI, Inc., is offering its common stock to the public for the first time ever....
Fantastic news! We've Found the answer you've been seeking!
Question:
Transcribed Image Text:
9. OPI, Inc., is offering its common stock to the public for the first time ever. You believe that each share of OPI's common stock will pay a $2.50 per share dividend semiannually for the next ten years. After the tenth year, you expect the semiannual dividends will grow at an APR of 3%, compounded semiannually, forever. 0 1 1-1/2 $2.500 $2.500 $2.500 $2.500 1/2 2 I 9-1/2 $2.500 10 $2.500 10-1/2 $2.50 x 1.015 11 $2.50 x 1.015*2 etc. Required: a. At what price would you expect OPI's stock to sell at the end of the tenth year if the market required an annual rate of return (APR) of 13%, compounded semiannually, at that time? b. What would you offer to pay for one share of OPI's common stock today (time zero) if you required an APR of 20%, compounded semiannually? c. Suppose that after ten years the market required a semiannual rate of return on OPI's come stock of 6%, but agreed with the dividend forecasts depicted above. At what price would a share of OPI's stock sell at the end of the tenth year? d. What rate of return, expressed as an APR, would you earn if you purchased a share of OPI's stock at t = 0 for the price you determined in part b, collected all of the expected dividends and then sold the share at the end of the tenth year for the price determined in part c? 9. OPI, Inc., is offering its common stock to the public for the first time ever. You believe that each share of OPI's common stock will pay a $2.50 per share dividend semiannually for the next ten years. After the tenth year, you expect the semiannual dividends will grow at an APR of 3%, compounded semiannually, forever. 0 1 1-1/2 $2.500 $2.500 $2.500 $2.500 1/2 2 I 9-1/2 $2.500 10 $2.500 10-1/2 $2.50 x 1.015 11 $2.50 x 1.015*2 etc. Required: a. At what price would you expect OPI's stock to sell at the end of the tenth year if the market required an annual rate of return (APR) of 13%, compounded semiannually, at that time? b. What would you offer to pay for one share of OPI's common stock today (time zero) if you required an APR of 20%, compounded semiannually? c. Suppose that after ten years the market required a semiannual rate of return on OPI's come stock of 6%, but agreed with the dividend forecasts depicted above. At what price would a share of OPI's stock sell at the end of the tenth year? d. What rate of return, expressed as an APR, would you earn if you purchased a share of OPI's stock at t = 0 for the price you determined in part b, collected all of the expected dividends and then sold the share at the end of the tenth year for the price determined in part c?
Expert Answer:
Answer rating: 100% (QA)
a To find the price of OPIs stock at the end of the tenth year we need to use the dividend discount model which calculates the present value of all future dividends and the stocks terminal value Using ... View the full answer
Related Book For
Intermediate Accounting
ISBN: 978-0324300987
10th Edition
Authors: Loren A Nikolai, D. Bazley and Jefferson P. Jones
Posted Date:
Students also viewed these accounting questions
-
Read the case study "Southwest Airlines," found in Part 2 of your textbook. Review the "Guide to Case Analysis" found on pp. CA1 - CA11 of your textbook. (This guide follows the last case in the...
-
Planning is one of the most important management functions in any business. A front office managers first step in planning should involve determine the departments goals. Planning also includes...
-
Managing Scope Changes Case Study Scope changes on a project can occur regardless of how well the project is planned or executed. Scope changes can be the result of something that was omitted during...
-
A drillstring is composed of 9,000 ft of 5-in. 19.5-lbm/ft drillpipe and 1.000 ft of drill collars having a 3.0-in. ID. Compute these items: a) (5 pts) Capacity of the drillpipe in barrels. b) (5...
-
Cycle Gear Corporation has incurred the following costs on job number W456, an order for 20 special sprockets to be delivered at the end of next month. Direct materials: On April 10, Requisition...
-
Why isnt the combination of consumer and producer surplus maximized if there is either excess demand or supply?
-
The stockholders' equity of Black Corporation at January 1 follows: The following transactions, among others, occurred during the year: Jan. 1 Announced a 4-for-1 common stock split, reducing the par...
-
Journalize the following sales transactions for Sandman Camera Store using the periodic inventory system. Explanations are not required. Dec. 3 Sandman sold $44,800 of camera equipment on account,...
-
Explain the basic components of cost-volume-profit (CVP) analysis. Why is it important to determine a company's break-even point?
-
A natural gas trading company wants to develop an optimal trading plan for the next 10 days. The following table summarizes the estimated prices (per thousand cubic feet (cf)) at which the company...
-
You are a systems administrator for Helios Health Insurance. Pat Smith, a user in the finance department, has been promoted to human resource (HR) manager, and you are tasked with changing...
-
Two items are omitted from each of the following three lists of cost of goods manufactured statement data. Determine the amounts of the missing items, Identifying them by letter. Work in process...
-
Calculate the amount of sod in square yards that is needed for the irregular area shown. Recalculate the amount of sod for the illustration shown if the dimensions are meters instead of feet. Answer...
-
Use the following data to find the direct labor efficiency variance if the company produced 3 , 5 0 0 units during the period. Direct labor standard ( 4 hours @ $ 7 . 0 0 / hour ) $ 2 8 . 0 0 per...
-
Develop an algorithm using the Java programming language that implements a basic stack data structure. Your stack must have the ability to push entries on the stack. Your stack must also have the...
-
Johnny who worked in England came to Canada with his wife Betty on holiday. He later returned to England alone, Betty remaining in Canada for health reasons. Johnny promised to pay Betty $5,000 per...
-
Mike's total RRSP contribution room for the current year is $8,000, while his wife Maria's room is $2,000. Mike has decided to contribute $5,000 to his own RRSP and $3,000 to a spousal RRSP for...
-
Compile data on consumption and expenditures for the following categories in 30 different countries: (1) food and beverages, (2) clothing and footwear, (3) housing and home operations, (4) household...
-
Under what conditions does a company anticipate price declines?
-
What is a non-interest-bearing note? How does accounting for a short-term non-interest-bearing note differ from a short-term interest-bearing note?
-
On January 1, 2007 Rodgers Company purchased $200,000 face value, 10%, three-year bonds for $190,165.35, a price that yields a 12% effective annual interest rate. The bonds pay interest semiannually...
-
Billy Tushoes recently received an offer to join the accounting firm of Tick and Check LLP. Billy would prefer to work for Foot and Balance LLP but has not received an offer from the firm the day...
-
Telecommunications, Inc., is a U.S. company, a global leader in information technology, and it specializes in building data network systems. The company is a major player in the industry, although it...
-
At the 2009 U.S. Tennis Open, a line judge called a foot fault against Serena Williams, causing her to lose a point at a critical juncture of her championship match against the ultimate winner, Kim...
Study smarter with the SolutionInn App