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Author Question: What if the company goes out of business in fifteen years and thus pays an annual dividend of 2.10 ... (Read 174 times)

EY67

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on: Jul 10, 2018
What if the company goes out of business in fifteen years and thus pays an annual dividend of 2.10 for only those fifteen years? What is the present value of a share for this company if we want a 10 return on the stock?
 
  A) 15.97
  B) 16.97
  C) 17.97
  D) 18.97

Question 2

If a firm with credit terms of 1/10 net 30 were to change its terms to 3/10 net 30, the result would
  probably be
 
  A) increased bank loans.
  B) an increase in the average level of accounts receivable.
  C) increased accounts receivable turnover.
  D) a decrease in accounts payable.


spencer.martell

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Reply #1 on: Jul 10, 2018
Answer to Question 1

Answer: A
Explanation: A) Keep in mind that the future price in 15 years is zero so that any discounted value is also zero. Thus, we are only concerned with the present value of the annuity from the 2.10 dividend. For this annuity, with r = 10 and n = 15, we get PVIFA = 7.60608, giving the present value of a share = P= 2.10  7.60608 = 15.973 or about 15.97.
MODE = END
INPUT 15 10 ? -2.1 0
KEY N I/Y PV PMT FV
CPT 15.97

Answer to Question 2

C


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