In payment for his help with the construction of Valhalla, Wotan offers Fafner two alternatives. First, he offers 1,260 per year forever (with the first payment in one year).
Second, he offers his sister-in-law, Freia (the girl with the golden apples). If Fafner thinks that Freia is worth 12,000 and his required rate of return is 10.5, which of the following is correct?
A) Freia is more valuable.
B) The perpetuity is more valuable.
C) The two are equal in value. He is indifferent between them.
Question 2
Ramble-On-Rose Florists Inc common shares are priced at 39.96 today and are expected to pay the next annual dividend of 1.85 in one year's time. Investors have historically required an 11 return for holding Ramble-On stock.
Assume that the dividends grow at a constant rate in perpetuity, and calculate the growth rate implicit in today's stock price. Then, calculate the fair price for the stock after the 1.85 dividend in one year's time. Finally, calculate the capital gain rate. That is, the percentage change in the stock price between today and one year from now.
A) 4.63, 30.39, 31.50
B) 4.63, 40.64, 5.38
C) 6.37, 39.96, 0.00
D) 6.37, 42.55, 6.37
E) 6.37, 42.55, 6.48
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