Academic Integrity: tutoring, explanations, and feedback — we don’t complete graded work or submit on a student’s behalf.

FIN 330 Fall 2018 lnstructori Jiahao Gu 5. (10 points) You plan to invest $1,000

ID: 2819825 • Letter: F

Question

FIN 330 Fall 2018 lnstructori Jiahao Gu 5. (10 points) You plan to invest $1,000 on the last day of every ycar for the nest 8 years. If the interest rate on the investment is 10% what is the value of your investment in 8 years? 6. (10 points) You are valuing the stock price of a public company. The company pays annual dividend. This year the company issues dividend of $0.8 per share. The analysts consider the company grows at a constant rate of 5%. The required return is 8%, what is the intrinsic value of the stock? If the current market price for the stock is $30 per share, would you purchase the stock or not purchase the stock? Page 4 of 5

Explanation / Answer

Answer 5;

Investment on last date of each year for 8 years = $1000

Rate of interest = 10%

FV Interest Factors for a One-Dollar Annuity Compounded at 10% for 8 Periods:

FV = [(1 + k)n - 1 ] / k

= [(1+10%)8 -1] / 10%

=11.43589

As such value of investment in 8 years = $1,000 * 11.43589 = $11,435.89 = $11,436 (Rounded off)

Answer 6:

Current year dividend per share = $0.8

Constant Growth rate = g = 5%

Required Return = k = 8%

Dividend next year = D1 = $0.80 * (1+ 5%) = $0.84

Current Intrinsic share value = P0 = D1 / (k - g)

= $0.84 / (8% - 5%)

= $28

Current market price of share is $30. Since the market price is higher than current intrinsic value, the share price is expected to fall. As such I would not purchase.