Suppose Mr. Lane just bought a share of BlueWind Co., a renewable energy startup. BlueWind promises to pay Mr. Lane $18 in dividends for one year and then the firm will shut down. Suppose that the liquidation value of the share is $3, and the rate of time preference is 5%. Then, according to the single-period dividend discount model, the present value of the cash payment received by Mr. Lane in one year would be

Answers

Answer 1

Answer:

The present value of the cash payment is $20

Explanation:

The present value of cash payment receivable by Mr Lane in one year's time is the today's equivalent amount of the dividend of $18 as well as the liquidation value of $3.

The present value is the total cash inflows multiplied by the discount factor

discount factor=1/(1+r)^n

where is the rate of time preference of 5%'

n is 1 i.e in one year's time

total cash inflows=$18+$3=$21

discount factor =1/(1+5%)^1=0.95238

present value of cash payment=0.95238*$21=$20

Related Questions

Which of the following statement(s) is(are) true regarding municipal bonds? I) A municipal bond is a debt obligation issued by state or local governments. II) A municipal bond is a debt obligation issued by the federal government. III) The interest income from a municipal bond is exempt from federal income taxation. IV) The interest income from a municipal bond is exempt from state and local taxation in the issuing state.

Answers

Answer:

I, III and IV Only.

Explanation:

A municipal bond is explained to be a debt obligation issued by a nonprofit organization, a private-sector corporation or another public entity using the loan for public projects such as constructing schools, hospitals and highways.

A municipal bond is categorized based on the source of its interest payments and principal repayments. A bond can be structured in different ways offering various benefits, risks and tax treatments. Income generated by a municipal bond may be taxable.

Answer: I) A municipal bond is a debt obligation issued by state or local governments.

III) The interest income from a municipal bond is exempt from federal income taxation.

IV) The interest income from a municipal bond is exempt from state and local taxation in the issuing state.

Explanation:

A municipal bond is usually a debt security issued by a state, or local government to finance its capital expenditures, which usually includes the construction of Roads, Bridges or Institutions( schools ). They can be considered as loans that an investor gives to local governments. This kind of bonds are exempted from federal taxes and most state and local taxes, Which makes them very attractive to interested individuals who are on high income tax brackets.

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