What is the maximum price that an investor should pay

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Question - An investment makes annual payments. The first payment of $250 250 is due to be paid exactly one year from today at t=1. Payments are then expected to grow in size at a rate of 19.0% annually until t=24. Payments are then expected to remain stable at that size until t=35. After t=35, payments will then grow at a rate of 4.0% annually for the foreseeable future (i.e. the payment at t=36 is 4.0% bigger than the payment at t=35).

A) What is the magnitude of the cash flow that is paid by the investment at t=36?

B) What is the maximum price that an investor should be willing to pay today (i.e. at t=0) for this investment given the above information about its cash flows? Assume that the appropriate discount rate for these cash flows is 14.0% per annum compounded annually.

Reference no: EM132860178

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