Purchase Solution

# Dividend yield, risk adjusted discount rate, present value

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Question 5. NBC Company has been growing at a 10% rate, but it just paid a dividend of D0=\$3.00. Due to a new product, NBC expects to achieve a dramatic increase in its short-run growth rate, to 20 percent annually for the next 2 years. After this time, growth is expected to return to the long-run constant rate of 10 percent. The company's beta is 2.0, the required return on an average stock is 11 percent, and the risk-free rate is 7 percent. What should the dividend yield (1/P0) be today?

3.93%,
4.60%,
10.00%,
7.54%,
2.33%?

Question 6. The Oneal Company is evaluating two mutually exclusive poluttion control systems. Since the company's revenue stream will not be affected by the choice of control systems, the projects are being evaluated by finding the PV of each set of costs. The firm's required rate of return is 13 percent, and it adds, or substracts 3 percentage points to adjust for project risk differences. System A is judged to be a high-risk project (it might end up costing much more to operate than is expected). The appropiate risk adjusted discount rate that should be used to evaluate Syatem A is?

A) 10%; this might seem illogical at first, but it correctlky adjusts for risk where aoutflows, rather than inflows, are being discounted.

B) 13%; the firm's requires rate of return should not be adjusted when evaluating outflow only projects.

C) 16%; since A is more risky, its cash flows should be discounted at a higher rate, because this correctly penalizes the project for its high risk.

D) Somewhere between 10% and 16% with the answer depending on the riskiness of the relevant inflows.

E) Indeterminate, or, more accurately, irrelevant because for such projects we would simply select the process that meets the requirements with the lowest required investment.

Question 7.

Assume that you would like to purchase a 100 shares of preferred stock that pays an annual dividend of \$6 per share. However you have limited resources now, so you cannot afford the purchase price. In fact, the best that you can do now is to invest your money in a bank account earning a simple interest rate of 6 percent, but where interest is compounded daily (assume 365-day calendar). Because the preferred stock is riskier, it has a required annual rate of 12 percent ( assume that this rate will remain constant over the next 5 years). For you to be able to purchase this stock at the end of 5 years, how much must you deposit in your bank account today, at t= 0?

\$2,985.00
\$4,291.23
\$3,138.52
\$3,704.18
\$4,831.25?

##### Solution Summary

Answers 3 Multiple Choice Questions on dividend yield, risk adjusted discount rate, present value

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