Chapter 7†Net Present Value and Other Investment

Finance for managers Chapter 7— Net Present Value and Other Investment Question 1 : List the methods that a firm can use to evaluate a potential investment. There are discounted and non-discounted cash-flow capital budgeting criteria to evaluate proposed investments. They are 1) Net present value: NPV is a discounted cash flow technique, which is the difference between an investment’s market value and its cost. NPV = Present value of cash inflow- Present value of cash outflow The investment should be accepted if the net present value is positive and rejected if it is negative. 2) Profitability index: PI is a discounted cash flow technique in which present value of an investment’s future cash inflows†¦show more content†¦Question 4 : Using the article from the Sydney Morning Herald, discuss why John Whiteman, the senior portfolio manager at AMP Henderson, can be considered ‘skilled’ in respect of his stock pickings. Why would it benefit fund managers to use discounted cash flows when picking stocks? According to the article of Sydney morning herald, Mr. Whiteman the senior portfolio manager is considered ‘skilled’ because he used to achieve the targets of his designed portfolio, in which most of his assumptions were write. Mr. Whiteman used to forecast for at least 10 years in which becomes less accurate. After plotting, he discounts the value back to today’s dollars in converting the future value into the present value. This in turn benefits the financial managers in knowing the value of the share today and can be easily know the price of the share is over or undervalued in the market today. If the shares are undervalued he can easily make his suggestion or a proposal in the purchase of the shares or vice versa. Mr. Whiteman’s analysis also depends on the credibility of the industry focusing mainly on the different aspects of the company. Question 5 : A firm that pays out 65% of its earnings as dividends has an accounting rate of return of 20%. Its P/E ratio is 10 and its earnings per share are 108 cents. (i) What is the price per share? Price per share (P0) = PE ratio* Earnings perShow MoreRelatedHW FIN 33311360 Words   |  6 Pagesï » ¿HW FIN 3331 Chapter 9 9.1. Warr Corporation just paid a dividend of $1.50 a share (that is, D0 = $1.50). The dividend is expected to grow 7% a year for 3 years and then at 5% a year thereafter. What is the expected dividend per share for each of the next 5 years? D0 = $1.50; g1-3 = 7%; gn = 5%; D1 through D5 = ? D1 = D0(1 + g1) = $1.50(1.07) = $1.6050. D2 = D0(1 + g1)(1 + g2) = $1.50(1.07)2 = $1.7174. D3 = D0(1 + g1)(1 + g2)(1 + g3) = $1.50(1.07)3 = $1.8376. 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