You are offered the opportunity to invest in shares of a company.

Today is September 21, A company has two project options, project E

2022. The company makes dividend payments each year on March 21. The first and project F. Cost of capital is 10%. a. Please
expected dividend payment per share is 110 ISK (on March 21, 2023). The annual calculate NPV and IRR for each project.
dividend payments are expected grow at a rate of 5% per year for the following 10 years, b. Does the IRR rule agree with the NPV rule?
afterwards at a rate of 3% forever. How much would you be willing to pay for one share of Please explain your reasoning.
this company today if your cost of capital is 10% per year?

The first dividend payment is made in 0.5 years (6 months). To be able to use the growing annuity
and growing perpetuity formula, the present value is first determined at t=-0.5 and finally
adjusted to t=0.
Step 1: Use the growing annuity formula to determine the present value
(at t=-0.5) of the first 11 dividend payment

Step 2: Determine the present value of the final growing perpetuity discounted to t=-0.5.

A company wants to issue a 6% coupon bond with

Step 3: Add the present values and adjust to t=0 to get the value of one share.
An investor would be willing to pay a maximum price of 1,893.36 ISK
Alternative solution: Determine the present value at t=0.5 and finally adjust to t=0. The result will
be the same.
annual coupon payments. The time to maturity is 2
years and the face value of this corporate bond is ISK
500 million. The credit spread of bonds with similar
default risk is 0.75% p.a.
From a financial newspaper you get the following
information on supposedly risk-free zero-coupon bonds
issued by the government each with a face value of 100:

3. Ronaldo is 45 years old and has not saved for retirement. Luckily, he just inherited
$69,000. Ronaldo plans to put a part of that money into an investment account which is
earning a 10% return. He will let the money accumulate for 20 years, when he will be ready
to retire. He would like to deposit enough money today so he could begin making
withdrawals of $51,000 per year starting at age 66 (21 years from now) and continuing for
24 additional years, when he will make his last withdrawal at age 90. Ronaldo will continue How much money can the company
to earn 10% on money in his investment account during his retirement years, and he wants raise when issuing the corporate
the balance in his retirement account to be $0 after his withdrawal on his ninetieth birthday. bond?
Is this inheritance enough to achieve this goal? (Please do all the related calculations). If it
is not enough, how much additional money will he need to achieve this goal? If it is Step 1: Determine the cash flows
enough, how much of the inheritance can be spent for shopping today? (20 points)

Inheritance is 69,000 and the difference is 188.55 to be spent

for shopping. The inheritance is enough to achieve this target.
Note: Alternatively, you can calculate the PV of 51,000s (for
25 years) which is 462,929.041. FV of inheritance is 69,000 *
Inheritance is 69,000 and the
1.1^20 = 464,197. Difference: 464,197 – 462,929 = 1,268. Pay
attention that should be discounted to today (1268 / 1.1^20)
difference is 188.55 to be
which is the same value with 188.55.

spent shop infor shopping. The

You have just completed a $40,000 feasibility study for a new
coffee some retail space you own. You bought the space

inheritance is enough to shop would

two years ago for $80,000, and if you sold it today, you would net
$120,000 after taxes. Outfitting the space for a coffee
require a capital expenditure of $33,000 plus an initial investment
achieve
of this
$5,400 in inventory. Whattarget.
is the correct initial cash flow for your
analysis of the coffee shop opportunity?