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720 Words
Nov 9th, 2013
3 Pages

Corporate Finance Tute-2 1. You are contemplating buying a pension policy. Your financial advisor tells you that to buy the pension policy, you have to pay (or contribute to) the pension fund an amount that is constant in real terms every year, starting 1 year from now, for the next 30 years (i.e. until and including the year 2039). In return, the pension fund provider shall pay an annual pension to you for the subsequent 30 years (i.e. starting in the year 2040) that is constant in real terms. Assume a long-term nominal interest rate of 6% per year. With your current standard of living (which you would want to retain once you retire), you expect that you would need Rs. 240,000 per year in real terms as pension. Assume that the

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Dividends and portfolio value are expected to grow at a constant rate. Your annual fee for managing this portfolio is 0.5% of portfolio value and is calculated at the end of each year. Assume that you will continue to manage the portfolio from now to eternity, what is the present value of the management contract? How would the contract value change if you invested in stocks with a 4% yield?

5. Phoenix Co. Faltered in the recent recession but has recovered since. EPS and dividends ahve grown rapidly since 2017. | 2017 | 2018 | 2019 | 2020 | 2021 | EPS | Rs 0.75 | 2.00 | 2.50 | 2.60 | 2.65 | Dividends | Rs 0.00 | 1.00 | 2.00 | 2.30 | 2.65 | Dividend growth | ---- | ---- | 100% | 15% | 15% |

The figures of 2020 and 2021 are of course forecasts. Phoenix’s stock price today in 2019 is Rs 21.75. Phoenix’s recovery will be complete in 2021, and there will be no further growth in EPS or dividends. A security analyst forecast next year’s rate of return on Phoenix stock as follows: r=DIVP+g=2.3021.75+.15=.256, about 25.6%

What’s wrong with the security analyst’s forecast? What is the actual expected rate of return over the next year?

6. The project requires an initial investment in plant and equipment of $6 million. This investment will be depreciated straight-line over five years to a value of zero, but, when the project comes to an end in five years, the equipment can in fact be sold for $500,000. The firm believes that working capital at

5. Phoenix Co. Faltered in the recent recession but has recovered since. EPS and dividends ahve grown rapidly since 2017. | 2017 | 2018 | 2019 | 2020 | 2021 | EPS | Rs 0.75 | 2.00 | 2.50 | 2.60 | 2.65 | Dividends | Rs 0.00 | 1.00 | 2.00 | 2.30 | 2.65 | Dividend growth | ---- | ---- | 100% | 15% | 15% |

The figures of 2020 and 2021 are of course forecasts. Phoenix’s stock price today in 2019 is Rs 21.75. Phoenix’s recovery will be complete in 2021, and there will be no further growth in EPS or dividends. A security analyst forecast next year’s rate of return on Phoenix stock as follows: r=DIVP+g=2.3021.75+.15=.256, about 25.6%

What’s wrong with the security analyst’s forecast? What is the actual expected rate of return over the next year?

6. The project requires an initial investment in plant and equipment of $6 million. This investment will be depreciated straight-line over five years to a value of zero, but, when the project comes to an end in five years, the equipment can in fact be sold for $500,000. The firm believes that working capital at

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