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Homework answers / question archive / 1 An equity analyst is estimating PLK Ltd’s share price at the end of four years from today
1 An equity analyst is estimating PLK Ltd’s share price at the end of four years from today. The company has recently paid a dividend of $1.30 which is expected to grow at 4% p.a. over the foreseeable future. If the company’s required rate of return on equity is 10% the analyst’s price estimate at the end of year 4 will be closest to:
Group of answer choices
$21.70.
$25.35.
$26.40.
$22.50.
2
A firm is evaluating the acceptability of an investment that costs $90,000 and is expected to generate annual cash flows equal to $20,000 for the next six years. If the firm's required rate of return is 10 percent, what is the net present value (NPV) of the project? Should the project be purchased?
1 P4 =D5/(Cost of capital - Growth rate)
P4 = Stock Price at the end of year 4.
D4?=Value of the dividend at the end of year 5
Dividend at the end of year 5
Current Dividend =$ 1.30
Dividend at the end of year 1 =$1.30(1+4%) =$ 1.352
Dividend at the end of year 2 =$1.352(1+4%) =$ 1.40608
Dividend at the end of year 3 =$1.40608 (1+4%) =$ 1.4623232
Dividend at the end of year 4 =$1.4623232(1+4%) =$ 1.520816128
Dividend at the end of year 5 =$1.520816128(1+4%) =$ 1.58164877312
Price at the end of year 4 = 1.58164877312/(10% - 4%)
= 26.3608128853
=$26.40 ( rounded as per the answer choice)
The price at the end of year 4 will be closest to $ 26.40
2
Present value of cash inflows = Cash flow * (1 - (1 + R)^(-N) / R
= 20000 * (1 - (1 + 10%)^(-6))/0.10
= 87105.21
NPV = Present value of cash inflows - Initial investment
= 87105.21 - 90000
= -2894.79
Since the NPV is negative the project should not be purchased
