1. Nyeil, Inc., is a consumer products firm that is growing at a constant rate of 7.0 percent. The firm’s last dividend was $3.36. If the required rate of return is 15.0 percent, what is the market value of this stock if dividends grow at the same rate as the firm?
2. You own shares of Old World DVD Company and are interested in selling them. With so many people downloading music these days, sales, profits, and dividends at Old World have been declining 6 percent per year. The firm just paid a dividend of $2.05 per share. The required rate of return for a stock this risky is 15 percent. If dividends are expected to decline at 6 percent per year, what is a share of the stock worth today?
3. Staggert Corp. will pay dividends of $5.00, $6.25, $4.75, and $3.00 in the next four years. Thereafter, the company expects its dividend growth rate to be constant at 9.0 percent. If the required rate of return is 17.5 percent, what is the current value of the stock?
4. Blanda Incorporated management is considering investing in two alternative production systems. The systems are mutually exclusive, and the cost of the new equipment and the resulting cash flows are shown in the accompanying table. If the firm uses a 8 percent discount rate for their production systems. (Enter negative amounts using negative sign, e.g. -45.25. Round answers to 2 decimal places, e.g. 15.25.)
Year System 1 System 2
0 -$13,700 -$43,300
1 13,700 31,600
2 13,700 31,600
3 13,700 31,600
Calculate NPV.
NPV of System 1 is $________ and NPV of System 2 is $__________.
Which system should the firm invest?