Assessing Future Financial Needs
Discussion Questions
Calculate the following:
- Calculate the present value (PV) of a cash inflow of $500 in one year and a cash inflow of $1,000 in five years, assuming a discount rate of 15 percent.
- Calculate the present value (PV) of an annuity stream of five annual cash flows of $1,200, with the first cash flow received in one year, assuming a discount rate of 10 percent.
- What is the present value of a perpetual stream of annual cash flows, with the first cash flow of $100 to be received in one year and with all subsequent cash flows growing at a rate of 3 percent, assuming a discount rate of 8 percent?
- Consider two bonds, Bond C and Bond D, both with a yield to maturity of 10 percent and with 5 years to maturity. These are standard bonds with semiannual coupon payments. Bond C has a coupon rate of 10 percent (with semiannual coupon payments); Bond D does not pay any coupons (i.e., it a zero-coupon bond). What is the price of each bond?
- What is the fair value today of a common share with expected annual dividends of $1.00, $1.05, and $1.10 in each of the next three years and an expected share price of $20 in three years, assuming a required return of 9 percent?