FNCE 601 - Section 4 - Page 2
of the bridge involves the Wensum Bridge Company receiving payments from the local township
of $1,089,000 at the end of 20X1 and $1,320,000 at the end of 20X2, at which time the bridge
will be finished and the company liquidated.
The firm must pay out a total of $630,000 at the
end of 20X1 for materials and to its employees for building the bridge. Similarly, at the end of
20X2 it must pay out $780,000.
After the 20X1 and 20X2 payments for materials and to
employees the remaining cash flow will be paid out in dividends.
All cash flows occur with certainty.
Investors opportunity cost of capital is 10%.
are 10,000 shares, what is the price of each share at the end of 20X0?
(a) Township Payments
(b) Construction Costs
(c) Dividends = (a)-(b)
(d) PV Divs = (c)/1.1
of firm = 417,273 + 446,281
PV each share = 863,554/10,000
Suppose these shares were being sold in the market at a price of $80.
What would you
You should borrow money at 10% and buy as many as possible.
You can use the dividend