1. (a) Suppose you plan to invest in a financial asset that will pay a $50 every
ID: 2818135 • Letter: 1
Question
1. (a) Suppose you plan to invest in a financial asset that will pay a $50 every year for the life of the company. You don’t expect the annual payment to ever grow, and similar financial assets have a 10% required rate of return. How much should the financial asset be worth today?
(b) Suppose you plan to invest in a different utility stock that will pay a $50 dividend for the life of the company. You expect the dividend to grow (g) by 1% per year, and similar stocks have a 6% required rate of return. How much should the stock be worth today?
Explanation / Answer
1(a) This is an example of perpetuity without growth
present value of the asset = A/required rate = 50/0.10 = 500
ANSWER : $500
1(b) This is an example of growing perpetuity
present value of the stock = A /(required rate - growth rate) = 50/(0.06 - 0.01) = 1000
ANSWER : $1000
Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.