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Finance Questions

1. An investment costs $3,000 today and provides cash flows at the end of each year for 20 years. The investment's expected return is 10 percent. The projected cash flows for years 1, 2, 3 are $100, $200, and $300 respectively. What is the annual cash flow received for each of the years 4 through 20 (17 years)? (Assume the same payment for each of these years.)

2. A financial analyst has been following Johns Inc., a new high-growth company. She estimates that the current risk-free rate is 6.25 percent, the market risk premium is 5 percent, and that John's beta is 1.75. The current earnings per share is $2.50. The company has a 40 percent payout ratio. The analyst estimates that the company's dividend will grow at a rate of 25 percent this year, 20 percent next year, and 15 percent the following year. After three years the dividend is expected to grow at a constant rate of 7 percent a year. The company is expected to maintain its current payout ratio. The analyst believes that the stock is fairly priced. What is the current price of the stock?

Solution Preview

Step- by-Step solutions to the following two questions:

1. An investment costs $3,000 today and provides cash flows at the end of each year for 20 years. The investment's expected return is 10 percent. The projected cash flows for years 1, 2, 3 are $100, $200, and $300 respectively. What is the annual cash flow received for each of the years 4 through 20 (17 years)? (Assume the same payment for each of these years.)

0 1 2 3 4 20

We need to use both present value and present value of annuity to solve this problem.

PV = FV x 1 where PV is the present value
(1 + i)n FV is ...

Solution Summary

This solution is comprised of a detailed explanation to answer the request of the assignment of more than 400 words of text.

$2.19