Demarius owns investment A and 1 share of stock B. The total value of his holdin

Question

Demarius owns investment A and 1 share of stock B. The total value of his holdings is 2,172.3 dollars. Investment A is expected to pay annual cash flows to Demarius of 350 dollars per year with the first annual cash flow expected later today and the last annual cash flow expected in 6 years from today.   Investment A has an expected annual return of 11.64 percent. Stock B is expected to pay an annual dividend of 38.51 dollars forever with the next dividend expected in 1 year. What is the expected annual return for stock B? Answer as a rate in decimal format so that 12.34% would be entered as .1234 and 0.98% would be entered as .0098.

Explanation / Answer

Lets NPV of stock A=0 Year Cash flow PVAF11.64% Net cash flow 1 350 0.8957 313.5077 2 350 0.8023 280.8202 3 350 0.7187 251.5409 4 350 0.6438 225.3143 5 350 0.5766 201.8222 6 350 0.5165 180.7795 Total 1453.7847 NPV= cash outflow- cash inflow 0=X-1453.7847 cash outflow=1454 Remaining value=2172-1454=718 Expected annual return= 38.51/718*100 5.36%

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