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Assignment-1 Solution

The document contains a series of questions and hints related to financial calculations involving dividends, market capitalization rates, investment decisions, and present value assessments. It covers topics such as stock pricing, cash flow projections, internal rate of return (IRR), and the implications of various financial decision-making methods. Each question is accompanied by multiple-choice answers and hints to guide the calculations.

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34 views3 pages

Assignment-1 Solution

The document contains a series of questions and hints related to financial calculations involving dividends, market capitalization rates, investment decisions, and present value assessments. It covers topics such as stock pricing, cash flow projections, internal rate of return (IRR), and the implications of various financial decision-making methods. Each question is accompanied by multiple-choice answers and hints to guide the calculations.

Uploaded by

ANJALI PATEL
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Week 1 Assignment Artificial Intelligence (AI) for Investments

Q1: A company is expected to pay $5 dividend by the end of the year, after which the stock
price is expected to be at $110. If the market capitalization rate is 8%, what is the appropriate
interval for the stock price today.
a) 90-95
b) 95-100
c) 100-105
d) 105-110
e) 110-120
Hint: P= (5+110)/1.08= 106.5
Q2: A company does not plow back any earnings and pays all in the form of dividends at $5,
which is expected to continue infinitely in future. If the current price is $40, what is the
appropriate interval for the market capitalization rate.
a) 9%-10%

b) 10%-11%

c) 11%-12%

d) 12%-13%

e) 13%-14%

Hint 40=5/r, r= 12.5%


Q3: If a company does not offer any dividends and plows back all the money, then it should
have zero (0) price.
a) No
b) Yes
c) Cannot say/more information is required
Hint: Even if a company is not paying dividends and plows back all the money in positive
projects, the share price is not zero. Since, the investors can get their hands on money by
selling the stock. The value of this stock represents the positive (or negative) NPV projects
taken by this company.
Q4: Identify the correct Investment decision
a) Raising funds through equity issuance.
b) Raising funds through Bank loan.
c) Repayment of interest on the bank loan.
d) Using cash flow to prepay the debt.
e) Purchasing plant and machinery for the upcoming project.
Hint: Raising funds through equity issuance, bank loans, repaying interest on bank loan, and
prepayment of debt are all financing decisions. Purchasing plant machinery and equipment
are all investment related decisions.
Q5: Which of the following is the most important goal of a firm and its managers.
a) Minimizing expenses for the current year
b) Minimizing expenses for the next three years
c) Maximizing cash inflows for the next three years
d) Maximizing the firm value (or the share price)
e) Maximizing the profit for the current year
f) Maximizing the profit for the next three years
Hint: Maximizing firm value (or share price) is the most important goal and incorporates all
the other dimensions (profit, costs, cash inflows, outflows, etc.).
Q6: The following cash flows are projected on a new firm-venture: $432, $137, $797, by the
end of the years 1, 2 and 3 respectively. The opportunity cost of capital is 15%. The present
value of these cash flows lie in the following interval.
a) 1000-1010

b) 1010-1020

c) 1020-1030

d) 1030-1040

e) 1040-1050

Hint: 432/1.15+137/1.15^2+797/1.15^3=1003.28
Q7: If the opportunity cost of capital is 9%, what is the appropriate interval for the present
value of $374 paid at the end of 9th year
a) 160-180
b) 180-200
c) 200-220
d) 220-240
e) None of the above
Hint: 374/1.09^9= 172.2
Q8: If the firm chooses a simple payback period as the decision rule, which of the following
is not true.
a) The firm may choose many short-lived projects, which may also have negative NPVs
b) The firm may miss out on many long-lived but positive NPV projects
c) The firm may not account for the time-value of money
d) The firm may not appropriately account for the risk of these projects
e) The firm will select only long-lived projects with negative NPV
Hint: If a firm chooses simple payback method, it may choose many short-lived project with
negative NPVs. Also, it may miss out many long term project with positive NPVs. The
method does not account for the time-value of money. Since, the time value is not considered
appropriately, and therefore, the risk of the project is not considered.
Q9: Compute the IRR of the project with the following cash flows.
Project 𝐶0 𝐶1 𝐶2
A -6,750 +4,500 +18,000

a) 85%-95%
b) 95%-105%
c) 105%-110%
d) 110%-115%
e) 115%-120%
NPV=0 =-6750+4500/(1+IRR)+18000/(1+IRR)^2; solving the equation IRR= 100%
Q10: Compute the present value of $1 received after 6-years, if your opportunity cost of
capital is 12%. The value lies in the following interval
a) $0.1-$0.2

b) $0.2-$0.3

c) $0.4-$0.5

d) $0.5-$0.6

e) $0.6-$0.7

Present value = 1/1.12^6=0.507

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