Suppose the current price of gold is $1,520 an ounce. Hotshot Consultants advises you that gold...
Suppose the current price of gold is $1,520 an ounce. Hotshot Consultants advises you that gold prices will increase at an average rate of 13% for the next two years. After that the growth rate will fall to a long-run trend of 3% per year. Assume that gold prices have a beta of 0 and that the risk-free rate is 5.75%. What is the present value of 1.6 million ounces of gold produced in 9 years?
(Do not round intermediate calculations. Enter your answer in billions rounded to 2 decimal places.)
Homework Answers
Solution-
Spot Price = $1520
Growth rate for next two years = 13% and long run growth rate = 3%
Hence, value of gold after 9 years = 1520 * 1.13^2 * 1.03^7
= 2387.047
Discount rate using CAPM can be calculated as-
= Rf + Beta * Market Risk Premium
= 5.75% + 0 * MRF
= 5.75%
Thus, Future value of 1.6 million ounces = $ 1.6 * 2387.047 Mn
= $ 3819.276 Mn
Present value= 3819.276/1.0575^9
= $ 2309.179 Mn
Answer
Thanks!
Current price of gold= $1520/ ounce
What is PV of 1.6 million ounce?
PV = $1520/ ounce x 1.6 million ounce
= $2432 million
= $2.432 billion
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