Problem 10-35 (Algo) Common stock value based on PV calculations [LO10-5]

Beasley Ball Bearings paid a $4 dividend last year. The dividend is expected to grow at a constant rate of 6 percent over the next four years. The required rate of return is 18 percent (this will also serve as the discount rate in this problem). Use Appendix B for an approximate answer but calculate your final answer using the formula and financial calculator methods.

1. Compute the anticipated value of the dividends for the next four years.

Note: Do not round intermediate calculations. Round your final answers to 2 decimal places.

1. Calculate the present value of each of the anticipated dividends at a discount rate of 18 percent.

Note: Do not round intermediate calculations. Round your final answers to 2 decimal places.

1. Compute the price of the stock at the end of the fourth year (P4)(4) .

Do not round intermediate calculations. Round your final answer to 2 decimal places.

1. Calculate the present value of the year 4 stock price at a discount rate of 18 percent.

Note: Do not round intermediate calculations. Round your final answer to 2 decimal places.

1. Compute the current value of the stock.

Note: Do not round intermediate calculations. Round your final answer to 2 decimal places.

1. Use the formula given below to show that it will provide approximately the same answer as part e.

Note: Do not round intermediate calculations. Round your final answer to 2 decimal places.

P0=D1Keg0=1

1. If current EPS were equal to $5.70 and the P/E ratio is 1.2 times higher than the industry average of 6, what would the stock price be?

Note: Do not round intermediate calculations. Round your final answer to 2 decimal places.

1. By what dollar amount is the stock price in part g different from the stock price in part f?

Note: Do not round intermediate calculations. Round your final answer to 2 decimal places.

1. With regard to the stock price in part f, indicate which direction it would move if: