Help beside Financial Accounting?
Your broker recommends that you purchase Good Mills stock at $30. The stock pays a $2.20 annual dividend that's expected to grow annually at 8 percent. (The same rate of growth is expected for its per-share earnings). If you want to swot 15 percent on your funds, should you purchase this stock? I have to show the calculation.If anyone knows how to do this on Excel, I'd appreciate it.
Thanks.
Answers: YES, buy it.
After 1 year you will hold
$30.00 * 1.08 + $2.20 = $34.6
Increase = 34.60 / 30 = 1.1533
%increase each year = 15.33%
At the cessation of 2 years you would have
$34.60 * 1.08 + $2.20 = $39.568
etc
place 2.20 contained by cell b1
place 1.08 in cell b2
place 30 within cell b3
1 year later; cell b4; +b3 * b$2 + b$1
2 year latter; cell b5; +b4 * b$2 + b$1
3 year later; cell b6; +b5 * b$2 + b$1
etc
Note the $ is used to use a fixed cell location, So if you do a
copy down, the cell row importance will not be incremented.
For a perpetuity,
Fair Price = Div1 /(k-g)
here, Dividend expected is 2.2
k= 15%, g = 8%
So Fair Value Price = 2.2/(0.15-0.08) = 2.2/0.07 = $31.43
Hence, going by this information, you should purchase the stock as its estimated fair pro is higher than the current price
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