year. After that, dividend 10%, what price should

Exploring Economics
8th Edition
ISBN:9781544336329
Author:Robert L. Sexton
Publisher:Robert L. Sexton
Chapter16: The Markets For Labor, Capital, And Land
Section: Chapter Questions
Problem 12P
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Matollows and 250 shillings in the following
year. After that, dividends are expected to grow at constant 5% per year. If the required rate of return is
10%, what price should investors pay for such shares today?
4. Suppose a firm is considering a project that would require an initial cash outlay of 15 million shillings and
expected to generate shs 4.5 million each year for the next 4 years. The firm assumes that the prices
and costs increases at the same rate and that the required rate of return expressed in nominal terms is
14%. The firm also practices a policy whereby cash flows are stated at the prices of period zero. The
inflation rate is expected to be 5%.
(a)Outline two ways in which the effects that inflation has on the acceptability of investment projects
could be considered.
(b)Using the NPV technique, is the project worth taking? What have you learned from your analysis as
far as treating inflation in investment analysis is concerned?
30/2021 4:39:41 PM
Page 1 of 2
Transcribed Image Text:Matollows and 250 shillings in the following year. After that, dividends are expected to grow at constant 5% per year. If the required rate of return is 10%, what price should investors pay for such shares today? 4. Suppose a firm is considering a project that would require an initial cash outlay of 15 million shillings and expected to generate shs 4.5 million each year for the next 4 years. The firm assumes that the prices and costs increases at the same rate and that the required rate of return expressed in nominal terms is 14%. The firm also practices a policy whereby cash flows are stated at the prices of period zero. The inflation rate is expected to be 5%. (a)Outline two ways in which the effects that inflation has on the acceptability of investment projects could be considered. (b)Using the NPV technique, is the project worth taking? What have you learned from your analysis as far as treating inflation in investment analysis is concerned? 30/2021 4:39:41 PM Page 1 of 2
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