Question

1. Casino Inc. expects to pay a dividend of $ 2.4 per share at the end of year 1 (D₁) and these dividends are expected to grow at a constant rate of 6% per year forever. If the required rate of return on the stock is 18%, what is the current value of the stock today?

2. Project A has following cashflows at years 0, 1 and 2 respectively: $ -1500, $ 750 and $ 1100. What is the Net present value (NPV) of project A if the discount rate is 12 %

Answer 1

1). Given about Casino Inc.

Expected dividend D1 = $2.4

dividend growth rate g = 6%

required rate of return rs = 18%

stock price today using constant dividend growth rate is

P0 = D1/(rs-g) = 2.4/(0.18-0.06) = $20

current value of the stock today = $20

2). Project A has following cashflows at years 0, 1 and 2 respectively: $ -1500, $ 750 and $ 1100. What is the Net present value (NPV) of project A if the discount rate is 12 %

C0 = $1500

CF1 = $750

CF2 = $1100

discount rate d = 12%

So, NPV of the project is sum of PV of future cash flows - initial cost

=> NPV = -C0 + CF1/(1+d) + CF2/(1+d)^2 = -1500 + 750/1.12 + 1100/1.12^2 = $46.56