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Homework answers / question archive / 1)Monsters Inc
1)Monsters Inc. is a utility company that recently paid a common stock dividend of $2.94 per share. If its divided growth rate is expected to remain at 4 percent per year indefinitely and its equity cost of capital is 7 percent, the current price of a share of Monsters' common stock is closest to $________. Input your answer without the $ sign and round your answer to two decimal places.
2)Suppose you borrow from a bank $1,997.26 today (t=0). You agree to pay back $3,943.65 in 5 years (t=5). The interest rate (%) that the bank charge you is closest to ________%. Input your answer without the % sign and round your answer to two decimal places.
1)ANSWER
CURRENT PRICE OF MONSTER'S COMMON STOCK = $101.92
DIVIDEN PAID (D) = 2.94
GROWTH RATE (g) = 4%
COST OF EQUITY (ke) = 7%
CURRENT PRICE OF MONSTER'S COMMON STOCK = D(1+g) / ke - g
= 2.94 x (1 + 0.04) / 7% - 4%
= 2.94 x (1.04) / 3%
=3.0576 / 0.03
=$101.92
2)Interest rate=(F/P)^(1/n)-1
Where
F= Future value to be repaid (given as $3,943.65)
P= Present value borrowed (given as 1,997.26)
And n= Period (given as 5 years)
Plugging the inputs,
Interest rate= (3943.65/1997.26)(1/5)-1
= 1.974530106^0.20-1
1.145757614-1 = 14.57576%
The interest rate is closest to 14.58 (rounded)
