Question

1) MoneyCo will pay you $20,500 a year for 10 years in exchange for $131,300 today. What interest rate will you earn on this annuity? A) 6.92 percent B) 7.91 percent C) 8.85 percent D) 9.05 percent E) 10.11 percent

2. Aria is losing significant market share and thus its managers have decided to decrease the firm's annual dividend. The last annual dividend was $.86 a share but all future dividends will be decreased by 0.8 percent annually. What is a share of this stock worth today at a required return of 17.8 percent? A) $4.99 B) $4.06 C) $4.41 D) $4.95 E) $4.25

Answer #1

HI

1) Below is the excel formula and value for finding interest rate:

Present Value (PV) | $131,300 | ||

time nper | 10 | ||

yearly payment PMT | $20,500 | ||

Interest Rate | 9.05% | ||

Hence Interest rate is 9.05%

2) Latest dividend D0= $0.86

growth rate g= -0.8%

required rate r = 17.8%

As per dividend discount model

Share Price = D0*(1+g)/(r-g)

=0.86*(1-0.8%)/(17.8%-(-0.8%))

=0.85312/0.186

**=$4.59**

**Thanks**

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