# Basics of Financial Management

Q1

Camel Industries is expected to pay an annual dividend of RM1.30 a share next month.

The market price of the stock is RM24.80 and the growth rate is 3 percent. What is the

firm's cost of equity?

Q2

An investment promises the following cash flow stream: RM1,000 at Time 0; RM2,000 at the

end of Year 1 (or at T=1); RM3,000 at the end of Year 2; and RM5,000 at the end of Year 3.

At a discount rate of 5%, what is the present value of the cash flow stream?

Q3

Recently you invested in a 20-year asset that pays you RM100 at t = 1, RM500 at t = 2,

RM750 at t = 3, and some fixed cash flow, X, at the end of each of the remaining 17

years. You purchased the asset for RM5,544.87. Alternative investments of equal risk

have a required return of 9%. What is the annual cash flow received at the end of each

of the final 17 years, that is, what is X?

Q4

You deposit RM1,000 in a bank account that pays 6% nominal annual interest, compounded

monthly. How much will you have in your account after 3 years?

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#### Solution Preview

Hello,

Please see attached the document. The answers are italicized for your convenience.

Q1

Camel Industries is expected to pay an annual dividend of RM1.30 a share next month.

The market price of the stock is RM24.80 and the growth rate is 3 percent. What is the

firm's cost of equity?

To solve for the cost of equity, we can apply the dividend growth model. The required return (cost) on equity is the next expected dividend divided by the current stock price plus the expected dividend growth. As a formula, it looks like this:

Cost of Equity = D1/P0 + g

D1 = Next Periods Expected Dividend

P0= Shares Current Market Value

g= expected dividend growth

Solving for the cost of equity is simple once we have this formula at our disposal.

Solution

Cost of Equity = (1.30/24.80) + 3% = 8.2%

Q2

An investment promises the following cash flow stream: RM1,000 at Time 0; RM2,000 at the

end of Year 1 (or at T=1); RM3,000 at the end of Year 2; and RM5,000 at the end of Year 3.

At a discount rate of ...

#### Solution Summary

The attached documents contains answers to four questions pertinent to discounted cash flows and investment valuation.