Question

"Share purchase price" Engineering Economics Question

This is the question along with its solution: http://i.imgur.com/L3prO.jpg.

Could someone please tell me how to this as well as explain to me generically, how to do it on a financial calculator or if you have the Texas Instruments BA II Plus, then I'd appreciate an explanation geared towards that specific calculator. Also, an explanation on the background theory for this question would be greatly appreciated since I'm weak in this material.

Thanks in advance!

Answer 1

See actually the thing which you have to calculate is Time Value of Money.

The Stock is paying you a dividend of $ 2 after one year, $ 3 after 2 years and thereafter the dividend grows at 10% rate till infinity.

Let us assume a stock that pays dividend D and it grows at a rate of g % per yr
therefore the present value of stock is
\[PV = \frac{D}{k-g}\]

let us suppose stock pays D1 in first yr D2 in second and so on

\[PV = \frac{D_{1}}{1+k} + \frac{D_{2}}{(1+k)^2} + \frac{D_{2} \times (1+g)}{(1+k)^3}+...........\to \infty\]

\[PV = \frac{D_{1}}{(1+k)} + \frac{D_{2}}{(1+k)^2} + \frac{D_{2}}{(k-g)\times (1+k)^2}\]

Answer 2

What does k represent?

Answer 3

(Sorry - I'm REALLY weak in this stuff).

Answer 4

k is return on investment