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A publicly traded stock is set to issue dividend of $5 next year, and the dividend is expected to grow at 4% for another 4 yeA zero-coupon (no coupons) annually compounded government bond is trading at $1200, with face value at $1000, and 5 years lefA potential project demands $300,000 upfront investment, and it is expected to generate $75,000 cash inflow in year 1, a loss

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Answer #1

Answer to Question 1:

D1 = $5.00

Growth rate for next 4 years is 4%

D2 = $5.0000 * 1.04 = $5.2000
D3 = $5.2000 * 1.04 = $5.4080
D4 = $5.4080 * 1.04 = $5.6243
D5 = $5.6243 * 1.04 = $5.8493
D6 = $5.8493

Required Return, rs = 10%

P5 = D6 / rs
P5 = $5.8493 / 0.10
P5 = $58.4930

P0 = $5.00/1.10 + $5.20/1.10^2 + $5.408/1.10^3 + $5.6243/1.10^4 + $5.8493/1.10^5 + $58.4930/1.10^5
P0 = $56.70

Current Price = $56.70

Answer to Question 2:

Face Value = $1,000
Current Price = $1,200
Time to Maturity = 5 years

Current Price = Face Value / (1 + Yield to Maturity)^Time Period
$1,200 = $1,000 / (1 + Yield to Maturity)^5
(1 + Yield to Maturity)^5 = 0.83333
1 + Yield to Maturity = 0.964
Yield to Maturity = -0.036 or -3.6%

Answer to Question 3:

Net Present Value = -$300,000 + $75,000/1.05 - $25,000/1.05^2 + $100,000/1.05^3 + $350,000/1.05^4
Net Present Value = $123,082

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