Question

1. Coca-Cola, Inc. (KO) expects to pay a dividend of $2.10 per share next year. Historically their dividends have been growing at a constant rate of about 5% per year. Based on the risk of KO, investor’s require a 7.5% return. Estimate the current stock price for Coca-Cola.

   	A.	$76.35
   	B.	$84.00
   	C.	$91.45
   	D.	$103.21
   	E.	cannot be determined

2.

1. Coca Cola is evaluating an investment in a new syrup production machine. The initial investment in the project is $110,000. It has been estimated that annual cash inflows of $40,000 will be generated by the machine for the next 5 years. The opportunity cost of the project is estimated to be 6%. Calculate the Net Present Value (NPV) of the project.

   	A.	$58,495
   	B.	$90,000
   	C.	$43,218
   	D.	$34,875
   	E.	$64,755

3.

1. Coca Cola is evaluating an investment in a new syrup production machine. The initial investment in the project is $110,000. It has been estimated that annual cash inflows of $40,000 will be generated by the machine for the next 5 years. The opportunity cost of the project is estimated to be 6%. Calculate the Internal Rate of Return (IRR) of the

   project.

   	A.	6%
   	B.	12.7%
   	C.	23.9%
   	D.	19.6%
   	E.	32.8%

4.

1. Coca Cola is evaluating an investment in a new syrup production machine. The initial investment in the project is $110,000. It has been estimated that annual cash inflows of $40,000 will be generated by the machine for the next 5 years. The opportunity cost of the project is estimated to be 6%. Calculate the Payback Period (PB) of the project.

   	A.	5 years
   	B.	2.5 years
   	C.	2.75 years
   	D.	3.75 years
   	E.	3.5 years

Answer 1

1)	B.	$         84.00
Working:
	Current Stock Price	=	D1/(Ke-g)		Where,
		=	2.10/(0.0750-0.05)		D1	=	$       2.10
		=	$               84.00		Ke	=	7.50%
					g	=	5%
2)	A.	$       58,495
Working;
Year	Cash inflow	Discount factor	Present Value
a	b	c=1.06^-a	d=b*c
0	$       -1,10,000	1.0000	$       -1,10,000
1	$             40,000	0.9434	$             37,736
2	$             40,000	0.8900	$             35,600
3	$             40,000	0.8396	$             33,585
4	$             40,000	0.7921	$             31,684
5	$             40,000	0.7473	$             29,890
	NPV		$             58,495
3)	C.	23.9%
Working:
	Year	Cash flow
	0	$ -1,10,000
	1	$       40,000
	2	$       40,000
	3	$       40,000
	4	$       40,000
	5	$       40,000
	IRR	=irr(C30:C35)
		23.9%
	C30:C35 is the range of cash flow from year 0 to 5.
4)	C.	2.75 Years
Working:
	Year	Cash flow	Cumulative cash flow
	0	$ -1,10,000	$       -1,10,000
	1	$       40,000	$           -70,000
	2	$       40,000	$           -30,000
	3	$       40,000	$             10,000
	4	$       40,000	$             50,000
	5	$       40,000	$             90,000
	Payback period	=	2+(30000/40000)
		=	2.75 Years