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# NPV, Bond Price & Stock Price

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3. NPV:
You have an opportunity to invest in a business that will pay \$200,000 in one year, \$400,000 in two years, \$600,000 in three years and \$800,000 in four years. You can earn 12% per year compounded annually on a mutual fund that has similar risk. If it costs \$1.2 million to start this business, what is the NPV & should you invest?

4. Bond Price:
What is the price of a 25-year, pure discount bond that pays \$50 at maturity if the current yield-to-maturity is 8 percent?

5. Stock Price:
Suppose a firm just paid a dividend of \$10 per share. Future dividends are expected to increase at a 5% annual rate. The required return is 25% per year. The value of the firm is estimated as:

#### Solution Preview

Problem Set - Week 6
1. Future Value and Compounding
Compounding: How much will \$1 invested today at 9% be worth in two years?

FV = \$1.1881 or \$1.19

2. Present Value and Discounting
Discounting: How much is \$1 that we will receive in two years worth today (r = ...

#### Solution Summary

Word document attached solves 3 problems on these topics, pointing out which formulas to use for which.

\$2.19