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Answer:
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Explanation:
Answer:
A. Draw the cash flow diagram.
since the site doesn't include a drawing tool I just prepared a table to depict cash flows associated to years one through four:
Year Cash inflows
1 $50 million
2 $60 million
3 $70 million
4 $100 million
B. What is the present worth of the gains for the first three years?
- the present value of the first three cash flows = $50/1.1 + $60/1.1² + $70/1.1³ = $45.45 + $49.59 + $52.59 = $147.63 million
C. What is the present worth of the gains for all four years?
- the present value of the first three cash flows = $50/1.1 + $60/1.1² + $70/1.1³ + $100/1.1⁴ = $45.45 + $49.59 + $52.59 + $68.30 = $215.93 million
D. What is the equivalent uniform annual worth of the gains through year four?
- equivalent annual worth = (NPV x r) / [1 - (1 + r)⁻ⁿ] = ($215.93 x 0.1) / [1 - (1 + 0.1)⁻⁴] = 21.593 / 0.31699 = $68.12 million
Answer:
Cost of equity = 13.6%
Explanation:
<em>We will work out the cost of equity, using the the dividend valuation model. The model states that the value of a stock is the present value of the future divided discounted at the cost of equity.</em>
The model is given below:
P = D× (1+g)/(r-g)
P- price of stock, D- dividend payable now, g- growth rate in dividend, r- cost of equity
<em>So we substitute </em>
14.65 = 1.48× (1+r)/(r-0.021)
<em>cross multiplying</em>
(r-0.021)× 14.65 = 1.48 × (1+r)
14.65r - 0.30765
= 1.48 + 1.48r
<em>collecting like terms</em>
14.65r - 1.48r = 1.48 + 0.30765
13.17
r = 1.78765
<em>Divide both sides by 13.17
</em>
r =1.78
/13.17= 0.135
r=0.135× 100= 13.6
Cost of equity = 13.6%
=0.135736522
