Fight Finance

Courses  Tags  Random  All  Recent  Scores

Scores
keithphw$5,921.61
cuiting$1,159.70
Visitor$1,088.61
Skywalke...$1,070.00
Carolll$1,013.33
Visitor$854.70
Visitor$840.00
Emma Lu$810.00
trungbin$803.09
Jade$785.80
alison$771.70
Visitor$760.00
zy$679.70
ninalee$669.70
Visitor$650.00
Visitor$637.00
Visitor$624.70
Nisrita$620.33
Visitor$603.33
Visitor$600.00
 

Question 630  mispriced asset, NPV, DDM, market efficiency

A company advertises an investment costing $1,000 which they say is underpriced. They say that it has an expected total return of 15% pa, but a required return of only 10% pa. Of the 15% pa total expected return, the dividend yield is expected to always be 7% pa and rest is the capital yield.

Assuming that the company's statements are correct, what is the NPV of buying the investment if the 15% total return lasts for the next 100 years (t=0 to 100), then reverts to 10% after that time? Also, what is the NPV of the investment if the 15% return lasts forever?

In both cases, assume that the required return of 10% remains constant, the dividends can only be re-invested at 10% pa and all returns are given as effective annual rates.

The answer choices below are given in the same order (15% for 100 years, and 15% forever):




Copyright © 2014 Keith Woodward