1. Your firm just paid dividends of $400. You forecast that dividends will grow at a rate of 40% per annum from year 0 to year 5. The growth in dividends will slow down to 20% per annum for the next five years (till year 10). Finally, beginning in year 11, you expect the firm to settle into its long-term growth rate of 2% per annum. You also expect your cost of capital to be 15% over the first 5 years, then 10% over the next 5 years, and 8% thereafter.
• What is the current value of your firm?
• What is the current value of your firm after 3 years?
2. Your uncle has set up a trust fund on your behalf. It will pay $25000 each year for 10 years. Unfortunately, the first payment will not be made until your 27th birthday, which is exactly 4 years from today. What is the present value of trust fund’s payments? Assume an interest rate of 8%.
3. A store offers two payment plans. Under the installment plan, you pay 25% down and 25% of the purchase price in each of the next 3 years. If you pay the entire bill immediately, you can take a 10% discount from the purchase price. Which is a better deal if the interest rate in 5% per year?