Problem 1: Maxwell Communications paid a dividend of $3 last year. Over the next 12 months, the dividend is expected to grow at 8 percent, which is the constant growth rate for the firm (g). The new dividend after 12 months will represent D1. The required rate of return (Ke) is 14 percent. Compute the price of the stock (P0).
Problem 2: Software Systems is considering an investment of $20,000, which produces the following inflows:
Year Cash Flow
1 $11,000
2 $ 9,000
3 $ 5,800
You are going to use the net present value profile to approximate the value for the internal rate of return. Please follow these steps:
a. Determine the net present value of the project based on a zero discount rate.
b. Determine the net present value of the project based on a 10 percent discount rate.
c. Determine the net present value of the project based on a 20 percent discount rate (it will be negative).
d. Draw a net present value profile for the investment. (Use a scale up to $6,000 on the vertical axis, with $2,000 increments. Use a scale up to 20 percent on the horizontal axis, with 5 percent increments.)Observe the discount rate at which the net present value is zero. This is an approximation of the internal rate of return on the project.
e. Actually compute the internal rate of return based on the interpolation procedure presented in this chapter. Compare your answers in parts d and e.