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A company plans to pay an annual dividend of $1.30 a share for two years commencing...

A company plans to pay an annual dividend of $1.30 a share for two years commencing two years from today. After that time, a constant $2 a share annual dividend is planned indefinitely. Given a required return of 12 percent, what is the current value of this stock? Please explain how you received the answer show your work.

A. $14.32

B. $9.65

C. $8.15

D. $5.58

E. $5.25

Which one of the following statements is correct? Assume cash flows are conventional. Explain how you got your answer

A.       If two projects are mutually exclusive, you should select the project with the shortest payback period.

B.       The profitability index will be greater than 1.0 when the net present value is negative.

C.       Projects with conventional cash flows may sometimes have multiple internal rates of return.

D.       If the required return exceeds IRR, the profitability index will be less than 1.0.

E.       When the internal rate of return is above than the required return, the net present value is negative.

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Answer #1

Answer to Q#1 (First question in the list Option-(A): $14.32 Reason Year Annual Dividends (1) 0.00 1.30 PV Factor @12% (2) 0.89286 0.79719 Present Value (1) x (2) $0.000$1.036 Year-1 Year-2 Year-3 1/(1+12%)1; 1/(1+12%); 1/(1+12%) 0.71178 $0.925 PV of regular dividends Add: PV of horizon value Current value of this stock $1.96 [Sum of PV of annual dividends from year-1 thru 3] $11.86 Ref: Workings] $13.82 Close to $14.32 (Difference may be due to rounding-off) Workings: Year-4s Dividend/ Required return PV of Perpetual Dividends in year-3 (Horizon value) Year-4s Dividend Required return Horizon value at year-3 (1) PV Factor @12% (2) PV of horizon value (1)x(2) $2.00 [Given] 12% $16.67 [$2.00 / 12%) 0.71178 [1/(1+12%)3] $11.86 [$16.67 x 0.71178]

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