The management of L Corporation is considering a project that would require an investment of $223,000 and would last for 6 years
1 answer:
Answer:
Payback period = 1.813 years
Explanation:
If a project has equal annual cash-flows, the payback period can be calculated using the formula:
The annual cash-flow figure that is to be used in this calculation should not include depreciation as depreciation is a non-cash item. Net operating income from the project would be $107,000 and to get to annual cash-flows, depreciation should be added back.
Annual cash-flows would therefore be $107,000
As such:
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Answer:
Ans. The current price of the stock is $56.82
Explanation:
Hi, well, the problem here is that we have different discount rates, in other words the required rate of return for the stock changes several times, therefore we are going to break this problem in 3 parts, or bring to present value all the cash flows in 3 steps. Let´s start with the value of the dividends.
We have to use the following formula.
Where, D(n-1) is last dividend and Dn is the dividend that we are looking for, for example, D1 = 3.10*(1+0.06)=3.29, D2=3.29*(1+0.06)=3.48, and so forth. The amount to pay on dividends per share is,
D1=3.29; D2=3.48; D3=3.69; D4=3.91; D5=4.15; D6=4.40; D(7)=4.66
Since the first 3 years are to be discounted at a 15%, this is how the formula should look like.
Now, for the second part, we have to bring all cash flows to year 3 at r(2)=13% and then bring it to present value at r(1)=15%. This is because we have 2 different discount rates, this is as follows.
Finally, we need to bring all the future cash flows from year 7 and beyond, notice that we need to use the return rate r(3) to bring everything to year 6, then we have to bring it to year 3 and then to present value, everything as follows.
So, the price of the stock is PV(1) + PV(2) + PV(3), or:
Price= $56.82/share
Best of luck.