(1) How much should you pay for an investment that will give you a return...

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Accounting

(1) How much should you pay for an investment that will give you a return of RM3,000 for every quarter indefinitely if cost of capital is 6 percent per annum compounded quarterly for the following scenarios:

i. Just after the dividend has been paid

ii. Just before the dividend is due to be paid

(2) Forsythia Institute would like to set up a scholarship that pays outstanding students RM20,000 in tuition fees. Given the cost of capital is 10 percent and the institute expect the scholarship to last forever, calculate how much should be set aside today if the scholarship is expected to start in 3 years time?

(3)Calculate the Net Present Value of a RM40,000 initial investment that is expected to generate a cash flow of RM10,000 at constant prices, at the end of each year for 5 years. Assume the nominal cost of capital is 6 percent per annum and inflation rate is 4 percent per annum. Should you proceed with the investment?

Answer & Explanation Solved by verified expert

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Lets break down each of the three questions step by step 1 Present Value of an Infinite Series of Cash Flows To determine how much you should pay for an investment that gives you RM3000 every quarter indefinitely we can use the formula for the present value of a perpetuity PV fracCr Where PV Present Value C Cash flow per period r Discount rate per period i Just after the dividend has been paid 1 Cash Flow C RM3000 2 Cost of Capital annual 6 compounded quarterly means the quarterly rate is r frac64 15 0015 3 Present Value See Answer

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