Question

years 1-3 payment is $5. years 4-7 payment is $5.10. year 8-12 paymenf is $5.15. year...

years 1-3 payment is $5. years 4-7 payment is $5.10. year 8-12 paymenf is $5.15. year 13-20 payment is $5.25. stock to sell at year 20 for $200. what is sale price if interest rate is 10%

Homework Answers

Answer #1

Let the payment received in year t be Pt

Value of Stock in Year 20 = S = 120

Hence, Sale Price = Present value of all payments received + Present value of Stock in year 20

= ΣPt*PV Factor + S*PV Factor

where PV Factor = 1/(1+r)t

r = interest rate = r = 10%

Year Payment PV Factor PV
1 5 0.909 4.545
2 5 0.826 4.132
3 5 0.751 3.757
4 5.1 0.683 3.483
5 5.1 0.621 3.167
6 5.1 0.564 2.879
7 5.1 0.513 2.617
8 5.15 0.467 2.403
9 5.15 0.424 2.184
10 5.15 0.386 1.986
11 5.15 0.350 1.805
12 5.15 0.319 1.641
13 5.25 0.290 1.521
14 5.25 0.263 1.382
15 5.25 0.239 1.257
16 5.25 0.218 1.143
17 5.25 0.198 1.039
18 5.25 0.180 0.944
19 5.25 0.164 0.858
20 5.25 0.149 0.780
NPV of Payment 43.523

Hence, Present Value of Stock = 43.523 + 200/(1+0.10)20 =  $73.25

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