Which investment option generates the larger future value, and why? Investing $4

Question

Which investment option generates the larger future value, and why? Investing $40,000 per year at 10% per year for 15 years, or investing $10,000 each quarter at 10% per year for 15 years? Two investors agree on a stock's next dividend and its growth rate, but investor B is willing to less for the stock than investor A. Explain, in the context of the dividend growth model, why this is so. Investor A and B are looking at a project. Both have the same required return but each has a different opinion about the project's cash flow from assets. Investor A calculates a 24% IRR while Investor B calculates a 28% IRR. Which investor calculates a higher NPV and why? You are looking at two mutually exclusive projects. B has an IRR of 30% and A has an IRR of 22%. The NPVs of A and B are the same when the required return is 17%. Describe: When you would choose Project B over Project A When you would choose Project A over Project B A company's internal growth rate is 15% and its sustainable growth rate is 24%. If the company grows at 26% what will happen to the company's debt to equity ratio if: Any additional external financing needed takes the form of equity. Any additional external financing needed takes the form of debt. Your boss has bet you a trip to Las Vegas that you won't be able to tell him the required returns to use to make a project have a positive NPV when it has two IRRs, one at 20% and the other at 28%. Before you say 'give me the tickets', you say:

Explanation / Answer

25- Future Value at 15 year if Invest 40000 per year= $40000*(1.10)^15= $167089.93

  Future Value at 15 year if Invest 10000 per quarter= $10000*(1.025)^60= $175991.59

   Option II will give Higher value because it compounds interest quarterly.

26- Dividend Growth model calculates fair value of share as follows

   Fair Value= Next Dividend/(Cost of Equity-growth rate)

Growth rate in dividend is based on past record of dividend which may varry in future, every investor estimates growth rate in different rate hence opinion of different investor may differ.

27-

Investor B has Higher NPV because he calculated high IRR. Both Investor has same required return but Cash flow of B is higher than what cashflow taken by A hence NPV of B will be higher than A.

28-

As NPV at 17% are same for both project, so we shall select Project B if we required to choose project on the basis of higher NPV because Project B has higher IRR and hence it will give higher NPV.

Investor IRR A 24% B 28%

Related Questions

Navigate

• Browse (All)
• Browse W
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.