Mr. Cook is considering buying one share of Meat company's stock, which is sold at $105 at t0. From period t1 on, Meat company pays $11 in every period forever. The constant rate of return Mr. Cook uses to discount future cash flows is 10%.

(a) Will Mr. Cook make such an investment?

Before the investment, Mr. Cook meets his financial adviser, Miss Lee. Miss Lee suggests that Meat company may go bankruptcy?

She estimates that Meat company will surely pay dividend at t1. However, from t2 on, conditional on that Meat company survives at tj, it goes bankruptcy at tj+1 with probability 1%? And if Meat company goes bankruptcy at tj, there will be no subsequent dividend payment (including that at tj)?

(b) After the meeting, will Mr. Cook invest in the project?

Answer rating: 100% (QA)

a To determine whether Mr Cook will make the investment he must calculate the present value PV of the expected cash flows from the investment The expe... View the full answer