Share
Explore BrainMass

NPV and Price of stock

1) You are considering a project which has been assigned a discount rate of 8%. If you start the project today, you will incur an initial cost of $480 and will receiv cash inflows of $350 a year for three years. If you wait one year to start the project, the initial cost will rise to $520 and the cash flows will incrase to $385 a year for three years. What is the value fo the option to wait?

2) Leslie's Unique Clothing Stores offers a common stock that pays an annual dividend to $2.00 a share. The company has promised to maintain a constant dividend. How much are you willing to pay for one share fo this stock if you want to earn 12% return on your equity investments?

Solution Preview

Please refer attachement for better clarity of tables.

Solution:

1)You are considering a project which has been assigned a discount rate of 8%. If you start the project today, you will incur an initial cost of $480 and will receive cash inflows of $350 a year for three years. If you wait one year to start the project, the initial cost will rise to $520 and the cash flows will increase to $385 a ...

Solution Summary

There are two problems. In solution to first problem, steps are explained to find out the value of option to wait if project is delayed by one year by NPV method.
In the solution to second problem, steps are explained to find out price of a stock based upon constant dividend model.

$2.19