Compute the present value of an ordinary annuity receiving 7 annual payments of

Question

Compute the present value of an ordinary annuity receiving 7 annual payments of $58 at an interest rate of: 6% Thora is considering buying a BMW bond for $674,205. This bond has a maturity value of $757. maturing in 3 years, with comparable interest rates of 12%, and coupon payments of $43. What should she pay? Parker Sled Manufacturing has been paying an annual dividend of $4.98 for the past 5 years, and plans to continue for the next 4 years. After that, they are expected to grow at 4%. Your required return to hold this stock is 18%. What would you be willing to pay for this stock BAMEB Motorcycles just paid a dividend of $5.27. You expect a growth rate of 21% for 2 years. After that, they are expected to grow at 22%. Your required return to hold this stock is 25%. How much is this stock worth? You received a dividend of $5.63 this morning and are attempting to decide if you should hold onto this stock. You expect this stock to grow at 13% for 9 years. After that, you think they will grow at 18%. Given the level of risk, you need a return of 19%. How much is this stock worth?

Explanation / Answer

Q 8. Formula of present value of annuity

PV = P * [ { 1- (1+r)-n} / r ]

where Periodic payments P =$ 58

interest rate r = 6% or .06

mumber of years n =7

therefore

PV = 58 * [ {1- (1 + .06) - 7} /.06]

= 58 * [ (1- 1.06-7) /.06 ] = 58 * 5.5824 = $ 323.778

The present value of annuity is $ 323.778

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