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What is the expected dividend yield and capital appreciation rate for the following share of common stock
What is the expected dividend yield and capital appreciation rate for the following share of common stock. (10 points)
Po = $41
P1 = $37
D1= $2.50
2. An investment today of $250,500 is expected to generate the following cash inflows during the next 6 years. The investment has a 10% expected rate of return. What is the Net Present Value (NPV) of this investment? (10 points)
|
Years |
Cash Inflows ($) |
|
1 |
110,000 |
|
2 |
85,000 |
|
3 |
95,525 |
|
4 |
82,890 |
|
5 |
5,250 |
|
6 |
3,990 |
Expert Solution
1. Dividend yield is computed as follows:
= D1 / P0
= $ 2.50 / $ 41
= 6.10%
Capital appreciation rate is computed as follows:
= (P1 - Po) / P0
= ($ 37 - $ 41) / $ 41
= - $ 4 / $ 41
= - 9.76%
The NPV is computed as shown below:
= Initial investment + Present value of future cash flows
Present value is computed as follows:
= Future value / (1 + r)n
So, the NPV is computed as follows:
= - $ 250,500 + $ 110,000 / 1.10 + $ 85,000 / 1.102 + $ 95,525 / 1.103 + $ 82,890 / 1.104 + $ 5,250 / 1.105 + $ 3,990 / 1.106
= $ 53,644.35
Feel free to ask in case of any query relating to this question
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