1. Merriweather Company is expected to grow at a constant rate of 6% per year. The company paid a dividend of $1.20 last year. If the required rate of return is 14%, what is the current price of the stock? What is the expected capital gains yield for the next year?
2. A local entrepreneur, is attempting to establish credit with your firm. He would like to buy some equipment today at a cost of $1,495. Your variable cost for the equipment is $1,875 and your monthly interest rate is 1.3 percent. You believe he could become a regular customer if you grant him 30 days credit. It is also believed that the probability of default is only 3 percent. What is the net present value of this decision?