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How much should investors pay for the shares

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Q1) Assuming an 8% interest rate, calculate the present value of the following streams of payments:

a) $1,000 per year forever, with the first payment one year from today.

b) $1000 per year forever, with the first payment two years from today (this is a deferred perpetuity).

c) $2,420 per year forever, with the first payment three years from today (also a deferred perpetuity).

Q2) Alpha company is expected to pay $2 of dividend per share that will increase 5% forever. If investors require 10% return on the company's shares, how much should investors pay for the shares?

Q3) A rich aunt has promised you $ 6, 000 one year from today. In addition, each year after that, she has promised you a payment (on the anniversary of the last payment) that is 2% larger than the last payment. She will continue to show this generosity for 20 years, giving a total of 20 payments. If the interest rate is 4%, what is her promise worth today?

Reference no: EM133029625

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