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Date Posted: 10:05:19 08/04/00 Fri
Author: Tam
Subject: Practive Final Fall 99

Dr. Charles or anyone, I need help with Q. 6 & 14

On Q. 6, I can't arrive at the answer because I think I am using the wrong discount rate to find the PV of the investment. I am unsure how to handle when the compounding interest is different the frequency of the payment. Can anyone post his/her solution.

On Q. 14, I am not coming up with the correct answer. Here's are my assumptions:
K = 6 + (5)1.4 = 13%
D = $1 D1 = $1.2 D2 = 1.44 D3 = 1.728 D4 = 1.8490
PV of dividend at T4 to infinity = 1.8490/(13%-7%) = 30.8160
Price of stock = CF0 = 0, CF1 = 1.2, CF2 = 1.44 CF3 = 1.728+30.8160, I = 13% NPV = 24.7443 but the correct is 20.16.
What am I doing wrong?

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