Answer: Purchases could be made from a vendor controlled by a buyer at prices higher than normal.
Explanation:
Based on the information given in the question, one possible fault of this system is that the purchases could be made from a vendor controlled by a buyer at prices higher than normal.
It should be noted that this system will help in curtailing the department managers buying unnecessary supplies. Also, payment cannot be made for supplies that are not received.
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
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
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
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.
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
The sequence of events that results in a new equilibrium interest rate, after the Fed makes the change you selected, may be described as follows:
Because there is ______________ money in the financial system, the quantity of interest-bearing financial assets such as bonds demanded _____________, which means that bond issuers __________________ sell the bonds. This process continues until the new equilibrium interest rate is achieved.
Answer:
Following are the responses to the given question:
Explanation:
Due to the increased amount of currency in the banking sector, the amount of interest-bearing economic stocks and bonds has reduced, because when interest rates fall and bond demand rises or vice versa, the interplay between bond yields and bond prices grows In this case, bond demand will decline, implying, therefore, corporate bonds must increase interest for issue debt still. It is because, whereas if bond rates increase, the price of the bond will drop, that will lead to an increase in the consumption for bonds.
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
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)
You are to receive a cash flow of $1,500 two years from now. Once received, you will invest the money and earn a 10.5% return. What is the value of the investment in year 5?
Answer:
$2,471.17
Explanation:
The value of the investment in 5 years time from the day of investment is known as the Future Value.
The Future Value is calculated by compounding the Principle Amount (amount invested) using the effective interest rate.
We can determine the Future Value using a Financial Calculator as follows :
PV = - $1,500
PMT = $0
P/YR = 1
N = 5
I = 10.5%
FV = ??
The Future Value (FV) is $2,471.17
Thus,
the value of the investment in year 5 is $2,471.17
Palmona Co. establishes a $200 petty cash fund on January 1. On January 8, the fund shows $38 in cash along with receipts for the following expenditures: postage, $74; transportation-in, $29; delivery expenses, $16; and miscellaneous expenses, $43. Palmona uses the perpetual system in accounting for merchandise inventory.
4.
value:
3.00 points
(1) Prepare journal entries to establish the fund on January 1.
check my workreferencesebook & resources
5.
value:
3.00 points
(2) Prepare journal entry to reimburse the petty cash fund on January 8.
check my workreferencesebook & resources
6.
value:
3.00 points
(3) Prepare journal entries to both reimburse the fund and increase it to $450 on January 8, assuming no entry in part 2.
Answer:
1. Date Account Titles and Explanation Debit Credit
1 Jan Petty cash $200
Cash $200
2. Date Account Titles and Explanation Debit Credit
8 Jan Postage Expenses $74
Merchandise inventory $29
Delivery expense $16
Miscellaneous expense $43
Cash $162
3. Date Account Titles and Explanation Debit Credit
8 Jan Petty cash $250
Cash $250
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.
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)
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.
As part of an estate settlement Mary received $1 million. She decided to use the money to purchase a small business in Anywhere, USA. If Mary would have invested the $1 million in a risk-free bond fund she could have made $100,000 each year. She also quit her job with Lucky.Com Inc. to devote all of her time to her new business; her salary at Lucky.Com Inc. was $75,000 per year.
1. At the end of the first year of operating her new business, Mary's accountant reported an accounting profit of $150,000. What was Mary's economic profit?
a. $25,000 loss
b. $50,000 loss
c. $25,000 profit
d. $150,000 profit 13.
2. What are Mary's opportunity costs of operating he r new business?
a. $25,000
b. $75,000
c. $100,000
d. $175,000
3. How large would Mary's accounting profits need to be to allow her to attain zero economic profit?
a. $100,000
b. $125,000
c. $175,000
d. $225,000
Answer:
Following are the solution to the given point.
Explanation:
For question 1:
Economic gains are distinct from bookkeeping gains. Accounting value also takes into account the cost of potential.
[tex]\text{Economic Profit = Accounting Profit - Loss of salary - Risk free bond income}[/tex]
[tex]= 150, 000 -75,000 - 1,00,000\\\\= - 25,000[/tex]
that's why "option a" is correct.
For question 2:
The "option d" is correct.
For question 3:
The "option c" is correct.
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.
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.
Suppose that Raphael, an economist from an AM talk radio program, and Susan, an economist from a school of industrial relations, are arguing Over saving incentives. The following dialogue Shows an excerpt from their debate:
Susan: I think it's safe to say that, in general, the savings rate of households in today's economy is much lower than it really needs to be to sustain an improvement in living standards.
Raphael: I think a switch from the income tax to a consumption tax would bring growth in living standards.
Susan: You really think households would change their saving behavior enough in response to this to make a difference? Because I don't.
The disagreement between these economists is most likely due to_____________ . Despite their differences, with which proposition are two economists chosen at random most likely to agree?
a. Rent ceilings reduce the quantity and quality of available housing.
b. Immigrants receive more in government benefits than they contribute in taxes.
c. Having a single income tax rate would improve economic performance.
Answer:
a. Difference in values
b. a. Rent ceilings reduce the quantity and quality of available housing.
Explanation:
The disagreement between these economists is most likely due to difference in values.
Economists are known to disagree a lot with each other and this is down to them having different values and perspectives with regards to several economic decisions. This is why there are different economic theories subscribed to by economists such as Keynesian and New Classical theories.
Despite these disagreements however, there are certain things they would always agree on and one of those is that rent ceilings reduce the quantity and quality of available housing.
The logic behind this is that imposing a rent ceiling would dissuade real estate investors from putting in more money to develop properties because the rent ceiling would limit the returns that they can get.
Supply of real estate would also fall because less investors would go into the market because they would fear being unable to recoup adequate returns on account of the rent ceiling.
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:
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:
Below are several amounts reported at the end of the year. Currency located at the company $ 950 Supplies 2,800 Short-term investments that mature within three months 1,850 Accounts receivable 3,100 Balance in savings account 8,100 Checks received from customers but not yet deposited 550 Prepaid rent 1,350 Coins located at the company 100 Equipment 9,000 Balance in checking account 5,800 Required: Calculate the amount of cash to report in the balance sheet.
Answer:
$17,350
Explanation:
Calculation to determine the amount of cash to report in the balance sheet.
Currency located at the company $950
Add Short-term investments that mature within three months 1,850
Add Balance in savings account 8,100
Add Checks received from customers but not yet deposited 550
Add Coins located at the company 100
Add Balance in checking account 5,800
Total Cash $17,350
Therefore the amount of cash to report in the balance sheet is $17,350
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
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.
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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
In choosing to acquire a TV manufacturer as part of your entry strategy to enter the Smart TV market, Apple intends to integrate the TV manufacturer within its own company. The transfer of which competencies between the two companies creates the possible scenario for success?
A. Fully integrate the company and combine it with the current computer business because monitors and televisions are similar in their requirements
B. Transfer the knowledge of touchscreen capabilities and the Apple ecosystem from Apple to the TV manufacturer to use for the new Apple Smart TV
Answer:
B. Transfer the knowledge of touchscreen capabilities and the Apple ecosystem from Apple to the TV manufacturer to use for the new Apple Smart TV
Explanation:
In the first case, Apple doesn't have technical expertise on manfucturing the TV. Here the differences in both the devies with respect to the technology that applied in ports, operating system tec
So here the technology that adapted would be difficult for implementation
Instead of this, the apple would create the better position.
So, the option b is correct
Hence, the option a is incorrect
A company purchased a computer system on January 2, 2010 for $1,600,000. The company used the straight-line depreciation method with an estimated useful life of 6 years and a residual value of $130,000. The company prepares financial statements at December 31. Assume the company decides to sell the computer system on July 1, 2012 for $1,000,000. Which of the following is not true concerning the journal entry(ies) required on July 1 is not correct?
a. The Equipment asset account must be credited for $1,600,000 to record the sale.
b. The loss on the sale is $12,500.
c. Accumulated Depreciation is debited for $612,500 in the entry to record the sale.
d. The depreciation expense must be recorded for 6 months, January 1 to July 1.
Answer: b. The loss on the sale is $12,500.
Explanation:
The value of the equipment on the date it was sold is:
= Cost price - Accumulated depreciation
Accumulated depreciation = Depreciation * Number of years of service
Depreciation = (1,600,000 - 130,000) / 6 years useful life
= $245,000
Number of years of service is 2.5 years because the asset was sold on July 1, 2012.
Accumulated depreciation = 245,000 * 2.5
= $612,500
Value at date of sale:
= 1,600,000 - 612,500
= $987,500
Gain (loss) on sale = Selling price - Value at date of sale
= 1,000,000 - 987,500
= $12,500
The $12,500 is a gain not a loss.
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
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.
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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