Please please anyone who know how to answer, help to answer. thank you in advance!!
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: risk-free 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 (5 marks)
(b) Compute the value of the stock (5 marks)
(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? (10 marks)
Question 2
A company is studying its finances for an island resort 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 risk-free 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. (7 marks)
(b) Calculate the net present value for the project (regarding the present to be 1 Jan 2016). (7 marks)
(c) Calculate the internal rate of return for the project. (6 marks)
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: risk-free 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 (5 marks)
(b) Compute the value of the stock (5 marks)
(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? (10 marks)
Question 2
A company is studying its finances for an island resort 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 risk-free 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. (7 marks)
(b) Calculate the net present value for the project (regarding the present to be 1 Jan 2016). (7 marks)
(c) Calculate the internal rate of return for the project. (6 marks)
