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1 answer:
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Answer:
Present Value of Investment Opportunity = $95,096
Explanation:
Net cash inflow = Cash inflow - cash outflow
Given that net cash inflow = $30,000 per month for 4 years
Rate of return = 10%
Present Value =
= $27,272.72 +$24,793.38 + $22,539.44 + $20,490.40
= $95,096 (rounded off to nearest dollar)
Present Value of Investment Opportunity = $95,096
Answer:
Yes, you would be interested in buying the stock at $20 because it's underpriced. It's actual intrinsic value is $23.76
Explanation:
Use dividend discount model to solve this question;
D1 = 2.75(1-0.10) = 2.475
D2 = 2.475 (1-0.10) = 2.228
D3 =2.228 (1-0.10) = 2.005
D4 = 2.005(1-0.10) = 1.805
D5 = 1.805(1+0.05) = 1.895
Next, find the Present values of each dividend;
PV (D1) = 2.475 /1.12 = 2.2098
PV (D2) = 2.228/1.12² = 1.7761
PV (D3) = 2.005/1.12³ = 1.4271
PV (D4) = 1.805/1.12^4 = 1.1471
Next find PV of constant growing dividends
PV (D5 onwards) =
PV (D5 onwards) = 17.2044
Next, sum up these PVs to find the price of the stock;
2.2098 + 1.7761 + 1.4271 + 1.1471 + 17.2044 = $23.76
Yes, you would be interested in buying the stock at $20 because it's underpriced. It's actual intrinsic value is $23.76