P6-3 Real and nominal rates of interest Zane Perelli currently has $100 that he can spend today on polo shirts costing $2.5 each. Alternatively, he could invest the $100 in a risk-free U.S. Treasury security that is expected to earn a9% nominal rate of interest. The consensus forecast of leading economists is a 5% rate of inflation over the coming year.
a. How many polo shirts can Zane purchase today?
b. How much money will Zane have at the end of 1 year if he forgoes purchasing the polo shirts today?
c. How much would you expect the polo shirts to cost at the end of 1 year in light of the expected inflation?
d. Use your findings in parts b and c to determine how many polo shirts (fractions are OK) Zane can purchase at the end of 1 year. In percentage, how many more or fewer polo shirts can Zane buy at the end of 1 year?
e. What is Zane's real rate of return over the year? How is it related to the percentage change in Zane's buying power found in part d? Explain.
P7-1 For each of the firms shown in the following table, use the data given to estimate its common stock value employing price/earnings (P/E) multiples,
Firm Expexted EPS Price/earnings multiple
Firm Expected EPS Price/earnings multiple
A $3.00 6.2
B $4.50 10
C $1.80 12.6
D $2.40 8.9
E $5.10 15.0
Tesla Motors shares were initially offered to investors at $17. Three years later, the price was over $90 per share. What was the compound annual return that Tesla investors owned over this period? Given that Tesla paid no dividends and was not expected to start paying dividends anytime soon, what method might analysts have used to value the company's shares in 2013? The company sold 13.3 million shares in its IPO with a par value of $0.001 per share. How much paid-in capital did Tesla record on its balance sheet as a result of the IPO? Do you think that the highly favorable Consumer Reports review of the Model S boosted Tesla's stock primarily because the review reduced the company's risk or because it boosted expected cash flows?