Solution

Assignment # 1

Business Finance (ACC 501)

SPRING 2021

Question # 1

Dt = D0 x (1 + g)t

D1 = 2.50

D2 = D1 x (1 + 0.17)1

= 2.50 x 1.17 = 2.925

D3 = 2.50 x (1 + 0.17)2 = 3.422

D4 = 2.50 x (1 + 0.17)3= 4.004

D5 = 2.50 x (1 + 0.17)4= 4.684

D6 = 4.684 x (1 + 0.12) = 5.246

P0 = D0 x (1 + g)/(R – g)

P5 = D6 /(R – g)

= 5.246 / (0.16 – 0.12)

= Rs. 131.15 (4 Marks)

Present Value of a Share of Stock:

Present Value of a Share of Stock = P0 = D1 /(1 + R)1 + D2 /(1 + R)2 + D3 /(1 + R)3 + D4 /(1+ R)4 + D5 /(1
+ R)5 + P5 /(1 + R)5

= 2.50/1.16 + 2.925/(1.16)2 + 3.4222 / (1.16)3+ 4.004 / (1.16)4+ 4.684/(1.16)5 + 131.15 / (1.16)5

= 2.155+2.173+2.192+2.211+2.230+62.442

= Rs. 73.403 (3 Marks)

 Question # 2

Cash Flows = Revenue – Cost = 70,000 – 40,000

Cash Flows = Rs. 30,000 per year (2 mark)

PV = [CF x (1 – 1/(1+r)t) / r ] + [ Salvage Value / (1+r)t ]

PV =30,000 x (1 – 1/(1.12)6/0.12 + 6,000 / (1.12)6

PV = 30,000 x 4.1114 + 6,000/1.9738

PV=123,342+ 3,039

PV = Rs. 126,381 (3 marks)

NPV = Initial Investment + PV NPV = – 90,000 + 126,381

NPV = Rs. 36,381 (2 marks)

Is it a good investment? (1 marks)

Yes, it is a good investment as NPV is positive