If Krell is expected to pay a dividend of $0.88 this year, and its stock price is expected to grow to $23.54 at the end of the year, what is Krell’s dividend yield and equity cost of capital? Answer: Dividend Yield = Dividend / Share price = 0.88/22 = 4% Capital Gain Rate = (End of year stock price – Share price today) / Share price today = (23.54 – 22) / 22 = 7% Total expected return (Equity cost of capital) = 4% + 7% = 11% 9-5 No Growth Company NoGrowth Corporation currently pays a dividend of $2 per year, and it will continue to pay this dividend forever. What is the price per share if its equity cost of capital is 15% per year? Answer: Assume: dividends are paid at the end of the year Stock pays a total of $2.00 in dividends per year. Valuing this dividend as a perpetuity: P = $2.00 / 0.15 = $13.33 9-6 Value of Operations of Constant Growth Summit Systems will pay a dividend of $1.50 this year.
1. A company would like to purchase a small technology firm for $5,000,000. The net cash flows from the small technology firm would be $2,000,000 per year in Years 1 & 2, then $1,000,000 per year in Years 3 through 5. After 5 years the patent of the small technology firm is estimated to be obsolete and the small-technology would not generate any net cash flows after Year 5. Should the company purchase the small technology firm?
What is your ranking if the interest rate is only 5% per year? c. What is your ranking if the interest rate is 20% per year? a. option ii, option iii, option i b. option iii, option ii, option i c. option I, option ii, option iii 8. Your daughter is currently 8 years old. You anticipate that she will be going to college in 10 years.
Chapter 4 (pages 132–136): 3. Calculate the future value of $2000 in a. five years at an interest rate of 5% per year; FV5= 2,000*1.05^5=2, 552.56 b. ten years at an interest rate of 5% per year; and FV10= 2,000*1.05^10=3,257.79 c. five years at an interest rate of 10% per year. FV5=2,000*1.1^5=3,221.02 d. Why is the amount of interest earned in part (a) less than half the amount of interest earned in part (b)? The amount of interest is less in part a than in part b because in the last 5 years you get interest on the interest earned in the first 5 years as well as interest on the original $2,000. 4.
Ans – 9.47% 3. A 2 – year Treasury security currently earns 5.13%. Over the next 2 years, the real interest rate is expected to be 2.15% per year and the inflation premium is expected to be 1.75% per year. Calculate the maturity risk premium on the 2 year Treasury Security. Ans – 1.23% 4.
He projects that he will need to have $500,000 in 5 years in order to get the business off the ground. He has found an investment that will yield 12% interest compounded quarterly. How much will he need to invest today to have the amount he requires to start his practice? Part A: Table 6-2 Part B: 3% Part C: 20N Part D: PV = FV(IF) 500000(.55368) 276840 Problem 3: Elizabeth Corday is borrowing $20,000 at 11% over 6 years. She will make annual payments on the loan at the end of each year.
80*7.1607+1000*.3555 = $928 • 5-2 Yield to Maturity for Annual payments Wilson Wonders’s bonds have 12 years remaining to maturity. Interest is paid annually, the bonds have a $1,000 par value, and the coupon interest rate is 10%. The bonds sell at a price of $850. What is their yield to maturity? 100+1000-850/12/1000+850/2 = 112.5/925 = .1216 or 12.16% • 5-6 Maturity Risk Premium The real risk-free rate is 3%, and inflation is expected to be 3% for the next 2 years.
A) 20% B) 25% C) 10% D) 15% E) None of the above Answer: B Response: r = (120+5-100)/100 = 25% 2. PC Company stockholders expect to receive a year-end dividend of $10 per share and then be sold for $122 dollars per share. If the required rate of return for the stock is 20%, what is the current value of the stock? A) $100 B) $122 C) $132 D) $110 E) None of the above Answer: D Response: P = (122+10)/1.2 = 110 3. The constant dividend growth formula P0 = D1/(r-g) assumes: A) The dividends are growing at a constant rate g forever.
If Casper decided to take out a loan that charges 20% APR over one year for the amount of £2000 over 12 months he would expect to pay £183 per month for 12 months with interest of £205. (candid money calculator accessed 28/7/11) If Casper makes the decision to use his credit card and he borrowed £2000 over 2 years at 15% APR his total monthly payments would be £96.08 per month, the interest would calculate to £306 this would be a total repayment of £2306 over 2 years. (candid money calculator accessed 28/7/11) Comparing the ‘loan’ to the credit card loan, Casper would pay his debt back quicker but at nearly double the price of the credit card loan, the advantage the credit card loan has, his monthly installments will be half of what the ‘loan’ but at 2 years rather than 1 year. Question 2 In question 2 of this essay I shall attempt to answer questions on expenditure and budgeting, giving a brief example from the study of the personal finance course book DB123 and the transcript of the dvd accessed on the Open University website.