TBS 907-Spring 2005 - Tutorial 2- NPV Analysis- Solutions

TBS 907-Spring 2005 - Tutorial 2- NPV Analysis- Solutions -...

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TBS 907- SPRING 2005 TUTORIAL 2- 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. Answer: a. PV = $100,000 b. PV = $180,000/1.12 5 = $102,137 c. PV = $11,400/0.12 = $95,000 d. PV = $19,000 × [Annuity factor, 12%, t = 10] PV = $19,000 × 5.650 = $107,350 e. PV = $6,500/(0.12 - 0.05) = $92,857 Prize (d) is the most valuable because it has the highest present value. 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.
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This note was uploaded on 07/10/2009 for the course FIN FIN taught by Professor Dr. during the Spring '09 term at Baptist College of Health Sciences.

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TBS 907-Spring 2005 - Tutorial 2- NPV Analysis- Solutions -...

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