Marko, Inc. is considering the purchase of ABC Co. Marko believes that ABC Co. c
ID: 2736447 • Letter: M
Question
Marko, Inc. is considering the purchase of ABC Co. Marko believes that ABC Co. can generate cash flows of $6,200, $11,200, and $17,400 over the next three years, respectively.
The outstanding bonds of Roy Thomas, Inc. provide a real rate of return of 3.9 percent. The current rate of inflation is 2.3 percent. What is the nominal rate of return on these bonds?
Marko, Inc. is considering the purchase of ABC Co. Marko believes that ABC Co. can generate cash flows of $6,200, $11,200, and $17,400 over the next three years, respectively.
The outstanding bonds of Roy Thomas, Inc. provide a real rate of return of 3.9 percent. The current rate of inflation is 2.3 percent. What is the nominal rate of return on these bonds?
Explanation / Answer
NPV = CF1/(1+i)^1 + CF2/(1+ i)^2 + CF3/(1+i)^3 = 6200 /(1.10) ^1 + 11200 / (1+1.1)^2 + 17400 / (1 .1)^3 = 6200/1.1 + 11200/ 1.21 + 17400 / 1.331 = 5636.36 + 9256.20 + 13072.88 = 27965.44 Hence 1st option is correct Nominal rate of interest = real rate of return + Inflation = 3.9 + 2.3 = 6.20% Hence 4th option is correct