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Valuing the investment options

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1. A best-selling author decides to cash in on her latest novel by selling the rights to the book's royalties for the next 6 years to an investor. Royalty payments arrive once per year, starting one year from now. In the first year, the author expects $400,000 in royalties, followed by $300,000, then $100,000, then $10,000 in the three subsequent years. If the investor purchasing the rights to the royalties requires a return of 7% per year, what should the investor pay?

I saw a similar question in the solution library, but I could not understand how the answer was reached. I'm having trouble figuring out exactly how to input the discount rate to find the answers. (1/1.07n) I get the right answer for the 1st year, but past that, my answers aren't coming out right.

2. Suppose a preferred stock pays a quarterly dividend of $2 per share. The next dividend comes in exactly one-fourth of a year. If the price of the stock is $80, what is the effective annual rate of return that the stock offers investors?

3. Gail Dribble is analyzing the shares of Petscan Radiology. Petscans stock pays a dividend once each year, and it just distributed this year's $0.85 dividend. The market prie of the stock is $12.14. Gail estimates that Petscan will increase its dividends by 7% per year forever. After contemplating the risk of Petscan stock, Gail is willing to hold the stock only if it provides an annual expected return of at least 13%. Should she buy Petscan shares or not?

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Solution Preview

1. A best-selling author decides to cash in on her latest novel by selling the rights to the book's royalties for the next 6 years to an investor. Royalty payments arrive once per year, starting one year from now. In the first year, the author expects $400,000 in royalties, followed by $300,000, then $100,000, then $10,000 in the three subsequent years. If the investor purchasing the rights to the royalties requires a return of 7% per year, what should the investor pay?

PV of royalty of Year 1=400000/(1+7%)^1=$373831.78
PV of ...

Solution Summary

This solution depicts the steps to estimate the present value of given investment options.

$2.19
See Also This Related BrainMass Solution

Time Value: Value That Alternative Option

You are an investment manager and a client wants to know the lump sum he would need to deposit today to receive a $35,000 supplement retirement annuity for 15 years beginning when he retires in 20 years. Looking at his investment options, you expect an average annual return on the annuity of 8 percent.

How else could you structure his payment so as not to be such a shock to his pocket book? Value that alternative option.

Here's the loaded document, "Below" (see attachment).

The Annuity Payment

Payment: $1,289.03
Years: 15
The Annual Rate of: 8%

$35,000.00 (The Future Value)

To make the payments easier for the retiree, I would extend the years to 20 since he is not retiring until five years later.

The Annual payment will be $764.83

New Annuity Payment

Payment: $764.83
Years: 20
The same Annual Rate of: 8%.

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