{[ promptMessage ]}

Bookmark it

{[ promptMessage ]}

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

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

This preview shows pages 1–3. Sign up to view the full content.

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. 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.

This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document
Answer: \$100.00 0.10 \$10 r DIV P 1 A = = = \$83.33 .04 0 0.10 5 g r DIV P 1 B = - = - = × + + + + + + = 6 7 6 6
This is the end of the preview. Sign up to access the rest of the document.

{[ snackBarMessage ]}

### What students are saying

• As a current student on this bumpy collegiate pathway, I stumbled upon Course Hero, where I can find study resources for nearly all my courses, get online help from tutors 24/7, and even share my old projects, papers, and lecture notes with other students.

Kiran Temple University Fox School of Business ‘17, Course Hero Intern

• I cannot even describe how much Course Hero helped me this summer. It’s truly become something I can always rely on and help me. In the end, I was not only able to survive summer classes, but I was able to thrive thanks to Course Hero.

Dana University of Pennsylvania ‘17, Course Hero Intern

• The ability to access any university’s resources through Course Hero proved invaluable in my case. I was behind on Tulane coursework and actually used UCLA’s materials to help me move forward and get everything together on time.

Jill Tulane University ‘16, Course Hero Intern