1) Suppose you know that a company’s stock currently sells for $60 per share and

Question

1) Suppose you know that a company’s stock currently sells for $60 per share and the required return on the stock is 10 percent. You also know that the total return on the stock is evenly divided between a capital gains yield and a dividend yield. If it’s the company’s policy to always maintain a constant growth rate in its dividends, what is the current dividend per share?

Current dividend per share: ??

2) An investment project has annual cash inflows of $5,200, $3,000, $4,300, and $3,500, for the next four years, respectively. The discount rate is 13 percent.

a) What is the discounted payback period for these cash flows if the initial cost is $4,900? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

b) What is the discounted payback period for these cash flows if the initial cost is $7,000? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

c) What is the discounted payback period for these cash flows if the initial cost is $10,000? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16

3) A firm evaluates all of its projects by applying the IRR rule. A project under consideration has the following cash flows:

If the required return is 14 percent, what is the IRR for this project?

IRR= ??

2) An investment project has annual cash inflows of $5,200, $3,000, $4,300, and $3,500, for the next four years, respectively. The discount rate is 13 percent.

Explanation / Answer

1. The total return on the stock is evenly divided between a capital gains yield and a dividend yield = 0.10/2 =0.05

   reuired return = dividend yield + growth rate

10% = 5% + 5%

current price = current dividend ( 1 + growth rate) / required rate - growth rate)

$60 = Current Dividend ( 1 + 0.05) / (0.10 - 0.05)

$60 = Current Dividend(1.05) / 0.05

Current dividend = $60 * 0.05 / 1.05

= $3 / 1.05

= $2.86

2. a year cash inflow PVF(13%,4years) present value cumulative present value

   1 5200 0.885 4602 4602

   2 3000 0.783 2349 6951

   3 4300 0.693 2980 9931

   4 3500 0.613 2146 12077

Discounted Payback period = (Y-1) + initial cost - cumulative present value of cash flow(Y-1)

Present value of cash flowY

Where ,Y = Years in which cumulative present value exceeds the initial investment

   =(2-1) + (4900 - 4602) / 2349

   = 1 + 0.13

   = 1.13 years

   b. Discounted Payback period = (3 - 1) + (7000 - 6951) / 2980

   = 2 + 0.02

   = 2.02 years

  c.    Discounted Payback period = (4 - 1) + (10000 - 9931)/2146

   = 3 + 0.03

= 3.03 years

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