An Investor has in his ownership a pack of 10.000 stocks which paid this year a dividend of $15. The dividend is supposed to increase annually in a rate of 5% for ever. The required rate of return is 10%. The investor sold his stocks in the price of their Present Value. With the money raised by this selling, the Investor aims to proceed to a new investment. Specifically, he thinks of the following mutually exclusive investments:

I. A Bond with a coupon rate of 15% and a par value of 2.500.000 which pays quarterly and which has a maturity of 15 years

II. A growing annuity which pays an amount of $350.000 annually, which grows at a rate of 4% rate for a period of 15 years

a) Calculate the value at which the investor sold his pack of stocks

b) Decide which is the best investment for the investor by using the NPV and the Profitability Index methods. Discuss briefly the results.

Answer rating: 100% (QA)

a Value of the pack of stocks 10000 x 15 1 010 13636409 b NPV Method For In... View the full answer