Question
Carnival Corp. is expected to pay its first annual dividendfive years from now. That payment will be $2.50 a share. Startingin year six, the company will increase the dividend by 2 percentper year. The required return is 15 percent. What is the value ofthis stock today?
a. $8.18
b. $9.50
c. $11.00
d. $12.27
e. $13.63
The net present value of a project's cash inflows is $9,456 at a 7percent discount rate. The profitability index is 1.16 and thefirm's tax rate is 35 percent. What is the initial cost of theproject?
a. $5,298.62
b. $5,910.00
c. $6,146.40
d. $6,782.12
e. $8,151.72
The Plush Toy Co. is considering a new toy that will produce thefollowing cash flows. The rate of return is 10 percent. Calculate the project's rate of return using the ModifiedInternal Rate of Return (MIRR).
Year 0 -$150,500
Year 1 $46,200
Year 2 $18,700
Year 3 -$39,100
Year 4 $166,300
a. 11.90 percent
b. 21.03 percent
c. 8.62 percent
d. 9.48 percent
e. The project's rate ofreturn cannot be determined as the cash flows areunconventional
Explanation / Answer
Dividend Payment in 5th year(D5) $2.50 Dividend Payment in 6th year (D6) [$2.50 (1.02)] $2.55 Dividend Payment in 7th year (D7) [$2.55 (1.02)] $2.60 Stock Value in 6th year (P6) = $2.60 / (0.15 - 0.02) =$20 Today's Stock Value (P0) = [D5/(1+R)5 +D6/(1+R)6 +P6/(1+R)6] Today's Stock Value (P0) =[$2.50/(1.15)5 +$2.55/(1.15)6 + $20/(1.15)6] Today's Stock Value (P0) =[$1.24 + $1.1024 +$8.6465] Today's Stock Value (P0) = $10.99 Today's Stock Value (P0) = $11 Net Present Value of Project's Cash inflows $9,456 Discount rate 7% Profitability Inded 1.16 Income tax rate 35% Profitability Index (PI) = PresentValue of Cash inflows / Initial Cash outflows 1.16 = $9,456 / Initial cashoutflows (or) Initial cost of the Project Initial Cost of the Project = $9,456 / 1.16 Initial Cost of the Project = $8,151.72 After tax Initial Cost of the Project =$8,151.72 (1-0.35) Initial Cost of the Project =$5,298.62 Hope this helps Dividend Payment in 5th year(D5) $2.50 Dividend Payment in 6th year (D6) [$2.50 (1.02)] $2.55 Dividend Payment in 7th year (D7) [$2.55 (1.02)] $2.60 Stock Value in 6th year (P6) = $2.60 / (0.15 - 0.02) =$20 Today's Stock Value (P0) = [D5/(1+R)5 +D6/(1+R)6 +P6/(1+R)6] Today's Stock Value (P0) =[$2.50/(1.15)5 +$2.55/(1.15)6 + $20/(1.15)6] Today's Stock Value (P0) =[$1.24 + $1.1024 +$8.6465] Today's Stock Value (P0) = $10.99 Today's Stock Value (P0) = $11 Net Present Value of Project's Cash inflows $9,456 Discount rate 7% Profitability Inded 1.16 Income tax rate 35% Profitability Index (PI) = PresentValue of Cash inflows / Initial Cash outflows 1.16 = $9,456 / Initial cashoutflows (or) Initial cost of the Project Initial Cost of the Project = $9,456 / 1.16 Initial Cost of the Project = $8,151.72 After tax Initial Cost of the Project =$8,151.72 (1-0.35) Initial Cost of the Project =$5,298.62