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Homework answers / question archive / 1) A stock currently sells for $25 per share and pays $0
1) A stock currently sells for $25 per share and pays $0.24 per year in dividends. What is an
investor’s valuation of this stock if she expects it to be selling for $30 in one year and requires 15 percent return on equity investments?
2) The Heating Division of Kobe International produces a heating element that it sells to Its customers for $41 per unit. Its, variable cost per unit Is $22, and Its fixed cost per unit Is $11. Top management of Kobe International would like the Heating Division to transfer 15,000 heating units to another division within the company at a price of $31. The Heating Division Is operating at full capacity. What is the minimum transfer price that the Heating Division should accept?
1) Computation of the valuation of the stock:-
Valuation of the stock = (Dividend / (1 + Rate)) + (Selling price / (1 + Rate))
= ($0.24 / (1+15%)) + ($30 / (1+15%))
= 0.21 + $26.09
= $26.30
2) Computation of the minimum transfer price:-
Minimum transfer price = Variable cost + Opportunity cost
= $22 + ($41 - $22)
= $22 + $19
= $41
