Hi, Can you help me with this? Thank you. 1.You won a lottery with a prize of $1

Question

Hi,

Can you help me with this? Thank you.

1.You won a lottery with a prize of $100,000. There are two payment options:
A. Ten consecutive annual payments of $10,000 each with the first payment made in one year.
B. One immediate lump-sum payment of $50,000.
Suppose that these two options are indifferent to you. What is your required rate of return per annum?

I need a % number for problem 1.

2. The stock of a company is selling at $15 per share. Suppose that this company just paid a dividend of %0.50 per share and the dividend is supposed to grow at a constant annual rate indefinitely. If the market requires an annual return of 12% for this stock, what is the growth rate of its dividend?

Thanks!

Explanation / Answer

1. The percentage would be 15% which would make both the options indifferent to me :

2. Annual Return = Dividend Paid/Price of the stock + Growth rate

   12% = 0.50/15+ Growth rate

    0.12 = 0.03 + Growth rate

    Growth rate of Dividend = 0.12-0.03 = 0.09 or 9%.

Year 1 2 3 4 5 6 7 8 9 10 Yearly Payment 10000 10000 10000 10000 10000 10000 10000 10000 10000 10000 Present Value of Payment 8688.22 7548.51 6558.31 5698.00 4950.55 4301.14 3736.93 3246.72 2820.82 2450.79

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