
Economics Economics Forum  Financial Mathematics, Econometrics, Operations Research, Mathematical Finance, Computational Finance 
 LinkBack  Thread Tools  Display Modes 
October 3rd, 2015, 11:03 PM  #1 
Newbie Joined: Oct 2015 From: Singapore Posts: 2 Thanks: 0  Need urgent help on my homework! date due tml.
Question 1 (help on part b & part c) The company plans to pay a dividend of \$5 per share at the end of the first year. It then promises its investors that its dividends will grow at a rate of 7% for the next 10 years after the end of the first year and at 5% after that. Suppose that you are given the additional information: riskfree rate = 1.25%, beta of stock = 0.8, expected market return = 12%. (a) Apply the Capital Asset Pricing Model to compute a suitable discount rate for the stock. 0.0125 + 0.8(0.120.0125) = 0.0985 (b) Compute the value of the stock (c) If the investor thinks that the growth projection is too optimistic and the growth rates need to be reduced to 5% for the next 10 years after the first year and 0% after that, how would she value the stock now? Question 2 A company is studying its finances for an development project. The project is planned to initiate on 1 Jan 2016 and is able to produce revenue cash flows starting from \$20 million on 1 Jan 2017 and this is expected to grow at 13% per year until 1 Jan 2025. All revenue cash flows are assumed to occur on the 1 Jan of each year. The initial cost of the project is \$100 million. Assume that the beta of K&L Construction is 1.1, the riskfree rate is 1.7% and the market risk premium is 9.5%. (a) Compute the cost of capital for the project. Explain the assumption that is made. Is the cost of capital: 0.017 + 1.1(0.095) = 0.1215? But if this is the case, the cost of capital is more than the expected growth rate, can someone help explain on this? (b) Calculate the net present value for the project (regarding the present to be 1 Jan 2016). (c) Calculate the internal rate of return for the project. Last edited by skipjack; October 4th, 2015 at 01:04 AM. 
October 3rd, 2015, 11:10 PM  #2 
Newbie Joined: Oct 2015 From: Singapore Posts: 2 Thanks: 0 
Sorry about formatting~ Question 1 The company plans to pay a dividend of \$5 per share at the end of the first year. It then promises its investors that its dividends will grow at a rate of 7% for the next 10 years after the end of the first year and at 5% after that. Suppose that you are given the additional information: riskfree rate = 1.25%, beta of stock = 0.8, expected market return = 12%. (a) Apply the Capital Asset Pricing Model to compute a suitable discount rate for the stock. (b) Compute the value of the stock (c) If the investor thinks that the growth projection is too optimistic and the growth rates need to be reduced to 5% for the next 10 years after the first year and 0% after that, how would she value the stock now? Question 2 A company is studying its finances for a development project. The project is planned to initiate on 1 Jan 2016 and is able to produce revenue cash flows starting from \$20 million on 1 Jan 2017 and this is expected to grow at 13% per year until 1 Jan 2025. All revenue cash flows are assumed to occur on the 1 Jan of each year. The initial cost of the project is \$100 million. Assume that the beta is 1.1, the riskfree rate is 1.7% and the market risk premium is 9.5%. (a) Compute the cost of capital for the project. Explain the assumption that is made. (b) Calculate the net present value for the project (regarding the present to be 1 Jan 2016). (c) Calculate the internal rate of return for the project. Last edited by skipjack; October 4th, 2015 at 01:06 AM. 
December 4th, 2015, 10:16 AM  #3 
Math Team Joined: Jan 2015 From: Alabama Posts: 2,960 Thanks: 802 
Many of the terms you are using, for example, "Capital Asset Pricing Model","cost of capital", and "internal rate of return" are from economics or business administration, not mathematics, so you cannot really expect people here to understand what they mean.


Tags 
date, due, financial accounting, homework, tml, urgent 
Thread Tools  
Display Modes  

Similar Threads  
Thread  Thread Starter  Forum  Replies  Last Post 
Due date formula  mwawrzyniec  Economics  1  May 12th, 2013 02:07 PM 
Help needed to find a date algorithm  glennroast  Computer Science  2  September 20th, 2011 05:09 AM 
What Fraction of 365 Does a Date Represent?  Xhin  Number Theory  16  September 8th, 2010 06:16 AM 
Wedding date formula  martsch  Algebra  2  June 11th, 2009 05:27 AM 
Urgent homework help for friday on numerical solution of ODE  ghazala  Applied Math  0  October 15th, 2008 01:06 PM 