Question

Question Two: You have an opportunity to invest in a deal that will make yearly payments forever. These payments will grow at a rate of 5% per year. You will receive your first payment of $2000 one year from today. Due to the risks associated with this investment, you will require a return of 10%. How much are you willing to pay for this deal today? (KN1:3.5 marks)

Answer 1

Hello,

The Deal value should be $40,000. Please refer below

$2,000.00 Payment Growth Rate Required rate of return 10% Cash Flows at year end 1 Terminal Value at the end of year 1 Terminal Value at the end of year 1 Present Value Today $2,000.00 $42,000.00 $44,000.00 $40,000.00

Payment Growth Rate Required rate of return 2000 0.05 0.1 Cash Flows at year end 1 Terminal Value at the end of year 1 Terminal Value at the end of year 1 Present Value Today 2000 =(C2*(1+03))/(C4-C3) =C6+C7 =C8/(1+C4)