NPV Flashcards
What is a perpetuity ( what is the formula the PV) and and with growth
an infinite stream of fixed payments received at the end of each period.
PV = C/r and PV = C/r-g.
You are valuing a stock based on future dividends. Next year’s dividend is expected to be $10. This dividend is then expected to grow at a rate of 20% for two years and subsequently at a lower rate of 5% forever after. The discount rate is 10%. What is the
stock price?
What is the formula for the present value of an annuity?
Here is for months, if we wanted early then get rid of n. n is the amount of compounding periods in a year
You have just read an advertisement reading: “Pay us $100 a year for 10 years and we will pay you $100 a year thereafter in perpetuity”.
If this is a fair deal, what is the rate of interest? ( very long algebra)
Kangaroo Auto is offering free credit on a new $10,000 car. You pay $1,000 down and then $300 a month for the next 30 months.
▶ Turtle Motors next door does not offer free credit but gives you $1,000 off the list price. If the rate of interest is 10% APR, which company is offering the better deal? ( hint APR)
What is a growing annuity and what is the present value formula) ?
A growing annuity has cash flow C that grows at a constant rate g:
So far we have assumed that future cash flows are certain which isnt always the case, if it is not what do we have to calculate, if risk is known?
Also should we use the risk free rate for risky projects?
You are thinking of buying a coffee shop and operating it for exactly one year. The purchase price is $25M. The end-of-year cash flows, which include both operating profits and resale value, depend on whether consumers are willing to buy coffee. With 80% probability, the economy recovers from the pandemic, in which case the cash flow is $32M. However, with
20% probability, consumers are still wary of going out, in which case the cash flow is only $22M. The opportunity cost of capital is 5%. Should you buy the coffee shop?
What is the internal rate of return framework?
What are pros and cons of NPV and IRR?
