kuvitia9f

2022-01-07

Your bank account pays an interest rate of 8 percent. You are considering buying a share of stock in XYZ Corporation for 110. After 1, 2, and 3 years, it will pay a dividend of 5.

You anticipate selling the stock after 3 years for $120. Is XYZ a wise investment? Support your response with calculations.

peterpan7117i

Beginner2022-01-08Added 39 answers

Step 1

To determine if this is a wise investment, we can calculate the present value for each of the three years, add them together and then compare the total present value to the $110 share price:

PV year $1=\frac{5}{{(1+0.8)}^{1}}$

PV year $1=\mathrm{\$}4.63}$

PV year $2=\frac{5}{{(1+0.8)}^{2}}$

PV year $2=\mathrm{\$}4.29}$

PV year $3=\frac{5+120}{{(1+0.8)}^{3}}$

PV year $3=\mathrm{\$}99.23}$

Step 2

Sum of all present values:

$\mathrm{\$}4.63+\mathrm{\$}4.29+\mathrm{\$}99.23=\mathrm{\$}108.15}$

Since this PV is less than the price of the stock ($110), we can conclude that this is not a worthwhile investment.

Answer:

Based on our calculation within, the would not be a good investment.

Foreckije

Beginner2022-01-09Added 32 answers

Answer:

XYZ is not a good investment because the price today is less than the present value of the revenuest it will produce.

Explanation:

To decide if buying a share of stock in XYZ Corporation for $110 is a good investment you must calculate the present value of the cash flow stream tha it generates, at the rate of 8% (compunded monthly), and compare with the purchase price of $110.

1. Present value of the three dividends:

Discount each dividend according to the year when it will be paid.

Montlhly interest rate$=\frac{0.08}{12}$

$PV=\frac{\mathrm{\$}5}{{(1+\frac{0.08}{12})}^{12}}+\frac{\mathrm{\$}5}{{(1+\frac{0.08}{12})}^{24}}+\frac{\mathrm{\$}5}{{(1+\frac{0.08}{12})}^{36}}}$

$PV=\mathrm{\$}12.82}$

2. Present value of the $120 (selling price)

The stock will be sold in 3 years (36 months)

$PV=\frac{\mathrm{\$}120}{{(1+\frac{0.08}{12})}^{36}}=\mathrm{\$}94.47}$

3. Total present value of the stock

Add the two present values found above:

$\text{Total present value}=\mathrm{\$}12.82+\mathrm{\$}94.47=\mathrm{\$}107.29}$

4. Compare with the current $110 price of the stock in XYZ Corporation

Since the investement today $110 is greater than the present value of the cash flows that it will produce this is not a good investment.

XYZ is not a good investment because the price today is less than the present value of the revenuest it will produce.

Explanation:

To decide if buying a share of stock in XYZ Corporation for $110 is a good investment you must calculate the present value of the cash flow stream tha it generates, at the rate of 8% (compunded monthly), and compare with the purchase price of $110.

1. Present value of the three dividends:

Discount each dividend according to the year when it will be paid.

Montlhly interest rate

2. Present value of the $120 (selling price)

The stock will be sold in 3 years (36 months)

3. Total present value of the stock

Add the two present values found above:

4. Compare with the current $110 price of the stock in XYZ Corporation

Since the investement today $110 is greater than the present value of the cash flows that it will produce this is not a good investment.

karton

Expert2022-01-11Added 613 answers

Answer: It is NOT a good investment.

Explanation:

Your bank account pays an interest of 9% per annum. This can be used as a discount rate to discount the dividends and the final Sales price to the present to see if the present value of Future benefits is more than what the stock is valued at now.

If the Present Value of the future benefits is higher than the cost now, XYZ is a good investment.

$4 are expected every year for 3 years and then on the third year, the stock will be sold for $100.

Discounting therefore gives us,

= 87.34

= $87.34

The Present Value of the future benefits including the future sales price is $87.34 which is less than the current cost of the stock at $90.

XYZ is NOT a good investment.

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