# sol_hw4 - University of Hong Kong Department of Economics...

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University of Hong Kong Department of Economics and Finance FINA 2802C – Investment and Portfolio Analysis First Semester: 2007-2008 Dr. Kam-Ming Wan Answers to Problem Set 4 (1) (a) This is a typical annuity problem, i.e. 25 . 1 \$ ] 05 . 1 1 1 [ 05 . % 50 * 2 . 0 20 = = PV (b) \$150 will be the “terminal” value of your investment if you are going to sell your share in six year. Therefore, the present value is: 53 . 56 \$ 05 . 1 150 ) 1 ( 20 = = + = T r FV PV (c) The amount you are willing to pay depends on the total discounted future cash flow you will receive, i.e., the sum of (a) and (b) above, which is \$57.78. (d) Since the current dividend is \$.2*50%=\$.1, the dividend in the next quarter will be \$.1*(1+g), i.e., g g g r DIV PV + × = = = 05 . ) 1 ( 1 . 0 400 \$ 1 . g=4.974% per quarter. Given the current stock price, the market must think that dividends will be growing at a quoted rate of 19.89%(=4*4.974%) per year. (e) By examining the above valuation, you will see that, r PV and g PV (2) In terms of dollar returns: Price of Stock Six Months From Now Stock price: 80 110 All stocks (100 shares) 8,000 11,000 All options (1,000) shares 0 10,000 Bills + 100 options 9,360 10,360 In terms of rate of return, based on a \$10,000 investment:

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sol_hw4 - University of Hong Kong Department of Economics...

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