Autumn 2005- TBS 907- Tutorial 1 - NPV Analysis

Autumn 2005- TBS 907- Tutorial 1 - NPV Analysis - TBS 907...

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TBS 907- AUTUMN 2005 TUTORIAL 1- NPV ANALYSIS Question 1 As winner of a breakfast cereal competition, you can choose one of the following prizes: a. $100,000 now. b. $180,000 at the end of five years. c. $11,400 a year forever. d. $19,000 for each of 10 years e. $6,500 next year and increasing thereafter by 5 per year forever. If the interest rate is 12 percent, which is the most valuable prize? Question 2 Consider the following three stocks: a. Stock A is expected to provide a dividend of $10 per share forever. b. Stock B is expected to pay a dividend of $5 next year. Thereafter, dividend growth is expected to be 4 percent per year forever. c. Stock C is expected to pay a dividend of $5 next year. Thereafter dividend growth is expected to be 20 percent a year for 5 years (i.e. until year 6) and zero thereafter. Assume cost of capital is 10%. Question 3 The furniture division of Playfurn Ltd., a profitable, diversified company, purchased a machine 5 years ago for $7,500. When it was purchased the machine had an expected useful life of 15 years and an estimated value of zero at the end of its life. The machine currently has a market value of $1000. the division manager reports that he can buy a
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