FIN 600 Assignment 2

Complete the following problems in either Microsoft Word or Excel.

Your work must be organized. Highlight your final answer.

Chapter 4:

4-5:  Company Z’s earnings and dividends per share are expected to grow indefinitely by 5% a year. If next year’s dividend is $10 and the market capitalization rate is 8%, what is the current stock price?

4-7:  If company Z (see Problem 5) were to distribute all its earnings, it could maintain a level dividend stream of $15 a share. How much is the market actually paying per share for growth opportunities?

Chapter 5:

5-3:   a. Calculate the net present value of the following project for discount rates of 0, 50, and 100%:

b. What is the IRR of the project?

5-8:  Consider the following projects:

a. If the opportunity cost of capital is 10%, which projects have a positive NPV?

b. Calculate the payback period for each project.

c. Which project(s) would a firm using the payback rule accept if the cutoff period were three years?

d. Calculate the discounted payback period for each project.

e. Which project(s) would a firm using the discounted payback rule accept if the cutoff period were three years?

Chapter 6:

6-2:  Mr. Art Deco will be paid $100,000 one year hence. This is a nominal flow, which he discounts at an 8% nominal discount rate:

PV 5 = 100,000/1.08 = $92,593

The inflation rate is 4%.

Calculate the PV of Mr. Deco’s payment using the equivalent real cash flow and real discount rate. (You should get exactly the same answer as he did.)

6-8:  The following table tracks the main components of working capital over the life of a four- year project.

Calculate net working capital and the cash inflows and outflows due to investment in working capital.

Show all your work to earn partial credit.