ACC501 Business Finance Assignment no 2 Semester fall 22 December 2011

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Question # 02:
a) Is this a good investment? Support your answer with complete calculations of NPV and Payback period of the project.

We will know this by applying the NPV rule,
Calculating the future cash flows:
PV = 10,000 x (1-1/1.15^8 ) / 0.15 + 2000 / 1.15^8
PV = 10,000 x 4.4873 + 2000 / 3.0590
PV = 45,527
Comparing this value with the estimated costs, NPV is;
NPV = -40,000 + 45,527
NPV = 5,527
Therefore, this is a good investment, as it would increase the total worth.
Requirement: What is the Payback period of the project?

Project costs = 40,000
After the first year cash revenue is 30,000
Remaining 10,000 will be paid during 2nd year so the Payback period of project is
10,000 / 30,000 = 0.3
1 + 0.3 = 1.3 Years



Question # 01


Requirement:
By using the given information, estimate the value of common stock under each of the following dividend-growth-rate assumption:

a) Dividends are expected to grow at an annual rate of 0% to infinity.
Po = D/R
= 210 / 0.11
Po = 1909.09
b) Dividends are expected to grow at a constant annual rate of 5% to infinity.
Po = Do x (1 + g) / R – g
Po = 210 x (1+0.05) / 0.11 – 0.05
Po = 220.5 / 0.06
Po = 3675
c) Dividends are expected to grow at an annual rate of 5% for each of the next three years followed by a constant annual growth rate of 4% in fourth year to infinity.

First we calculate the present value of stock price three years then we will add in the present value of the dividends that will be paid between now and then.

So, the price in three years is:
P3 = D3 x (1 + g) /(R - g)
To find the value of D3 we will use:

Dt = D0 x (1 + g) ^t
D3 = 210 x (1.05) ^3
D3 = 243.096
Now Price till 3rd year:

P3 = 243.096 x (1.04) / (0.11 – 0.04)
P3 = 4254.16
Po = Do(1+g)^1 / (1+R)^1 + Do(1+g)^2 / (1+R)^2 + Do(1+g)^3 / (1+R)^3 + P3 + Do(1+g)^4 / (1+R)^4

After putting the values calculate value of stock …

For fourth year your growth rate g = 0.04