Financial Management

Posted: October 17th, 2013

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Financial Management

Dividend is =$3.75

Growth of the stock is at= 8/100 or 8%

The Market Rate of Return (RR) = 16/100 or 16%

Hence to find the price of the share is

Dividend (1+ growth of the share)/ Annual Rate or Return – Growth of the Share (Libby, Robert, Patricia, & Daniel, pp.57)

=$3.75(1+8/100)/ 16/100-8/100           (Weygandt, Jerry, Donald & Paul, 49)

= $3.75(1.08)/ (16/100-8/100)

Value of a single share = $ 50.625

The annual rate of return is not influenced by the rate of profitability of the organization. The rate is kept constant especially for preference shares, which accrue specific rates of return, or share of the profits within the organization. In addition, the annual rate of return is used to subtract the growth of the share. This enables arrival of the actual independent rate of growth of an entity.

The market rate of retune is conditional and is determined by the various market forces. The basic forces, which determine the profitability or the market rate of return within an organization, are the kind of demography of market within which the organization operates in. monopolies accrue different rates of market return in comparison to the entities, which operate within oligopolies or perfect competition markets.

In the calculation, the calculation involves the addition of the growth of the share to a numeral value of one. This is because it enables to find a better value as the growth rate is given in percentage rates. The dividend is the multiplied by the value found from the addition from the numeral one and the growth of the share. In addition, the values are then divided by the values found after the subtraction of the growth of share from the annual rate of return. The calculations enable as to get a clarified view of the share value and the benefits accrued to the share. However, the limitations associated with the calculation of the share doe not enable the calculation of future values of the share. In addition, the values calculated only relate to a specific financial period and they are only applicable in such a period. The growth of a share is determined by the market conditions of that specific period.

Work cited

Libby, Robert, Patricia A., & Daniel G. Short. Financial Accounting. Boston: McGraw-Hill/Irwin, 2004. Print.

Weygandt, Jerry J, Donald E. Kieso, & Paul D. Kimmel. Financial Accounting. New York, NY: Wiley, 2003. Print.