1. A stock will pay dividends of $? four years from today, $? five years from today, and $? six years from today. There will be no dividend payments prior to year 4. After year 6, the growth rate in dividends per year is expected to be 6% forever. The required return on the stock is ?%. If P5, the price of the stock at year 5, is estimated to be $37.60, then P8 (the price of the stock 8 years from now) should be $_____.
2. Suppose your firm is considering investing in a project with the cash flows shown below, that the required rate of return on projects of this risk class is 8 percent, and that the maximum allowable payback and discounted payback statistics for the project are 2.0 and 3.0 years, respectively.
Time: 0 1 2 3 4 5 6
Cash flow –$7,200 $1,150 $2,350 $1,550 $1,550 $1,350 $1,150
Use the NPV decision rule to evaluate this project.