How much would this worksheet be? Due tomorrow night by midnight
ECON 410 Fall 2020 Problem Set #2 Submit your answers on Canvas by 11:59 p.m. on November 9th (10% per 24 hours late penalty) Follow the rounding conventions we used in class (three decimals for exponential calculations and two decimals for the final monetary amounts). Round rates of returns to three decimals. Working with the Gordon Growth Model 1. Using the Gordon Growth Model, assume a required return on investment in equity of 5% and calculate the value of each of the following stocks (round to two decimals): (a) A stock with an expected future dividend of $2.40 and an expected dividend growth rate of 3%. (b) A stock with an expected future dividend of $1.80 and an expected dividend growth rate of 1%. 2. Using the Gordon Growth Model, assume a required return on investment in equity of 10% and calculate the value of each of the following stocks (round to two decimals): (a) A stock with a recent dividend of $7.00 and an expected dividend growth rate of 3%. (b) A stock with a recent dividend of $4.50 and an expected dividend growth rate of 4%. Working with the Exchange Rates · You plan to ‘invest’ $20,000 in no-risk government discount bonds. · Assume a 3% interest rate for United States government bonds · Assume a 7% interest rate for Mexican government bonds · At the current exchange rate, assume 20 Mexican pesos are worth one U.S. dollar 1. Calculate the value of your $20,000 investment one year from today if you place the entire sum in U.S. bonds. 2. Convert the entire $20,000 into pesos. How many pesos do you start with? 3. If you invest all of the pesos in Mexican government bonds, then what is the value of your investment (in pesos) one year from today? 4. If the peso depreciates against the U.S. dollar by 4% then how many U.S. dollars will you get when you convert the pesos from next year back into dollars? 5. Instead of a 4% depreciation, assume a 2% appreciation of the peso. How many U.S. dollars will you get when you convert the pesos from next year back into dollars? Working with the NPV and ROI You want to assess two competing projects using cost-benefit analysis and the tools of discounting. Start with a cost-benefit approach that focuses upon net monetary benefits. Discount the future at a real rate of 3.5% (so inflation is not an issue.) Project A. This project has an initial cost of 8,000 payable immediately. There is an additional expense of $12,000 one year from now. The expected revenues are $4,200 two years from now, $7,200 three years from now, and $12,000 four years from now. Calculate the net present value of Project A. (Round off to two decimals.) Calculate the return on investment for Project A. (Round off to three decimals.) Project B. This option has two costs: $24,000 payable immediately and $6,400 payable two years from now. You anticipate revenues of $2,500 one year from now, $12,200 three years from now, and $21,000 four years from now. Calculate the net present value of Project B. (Round off to two decimals.) Calculate the return on investment for Project B. (Round off to three decimals.) Your organization cannot pursue both projects, so you have to prioritize. Which project do you recommend? Why? Explain your answer in some detail.