Question

To retain high-performing engineers, a large semiconductor company provides corporate stock as part of the compensation package. In one particular year, the company offered 1000 shares of either class A or class B stock. The class A stock was selling for $30 per share at the time, and stock market analysts predicted that it would increase at a rate of 6% per year for the next 5 years. The class B stock was selling for $20 per share, but its price was expected to increase by 12% per year. At an interest rate of 8% per year, which stock should the engineers select on the basis of present worth analysis and a 5-year planning horizon?

Answer 1

Answer:

class A stocks

Explanation:

in 5 years, class A stock will be worth = $30 x (1 + 6%)⁵ = $40.15

in 5 years, class B stock will be worth = $20 x (1 + 12%)⁵ = $35.25

now we need to determine the present value if each stock:

class A stock present value = $40.15 / (1 + 8%)⁵ = $27.33

class B stock present value = $35.25 / (1 + 8%)⁵ = $23.99

since the present value of class A stock is higher, then the engineers should select that type of stocks.