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An investor begins a business with a $1,000 investment. The company has these results for the first two years: - Income of $120 in the
An investor begins a business with a $1,000 investment. The company has these results for the first two years: - Income of $120 in the first year - Pays out no dividends in the first year. - Income of $120 in the second year - Pays out the entire cumulative income of $240 as dividends, and returns the original $1,000 investment. The discount rate for this investment is 10 percent. The PV factors for 10% are: 1. One year, 0.90909 2. Two years, 0.82645 Required: 1. What are the abnormal earnings for year 1 ? 2. What are the abnormal earnings for year 2 , keeping in mind that the book value at the beginning of year 2 is the original investment (\$1,0C 3. What is the PV of the two years of abnormal earnings? 4. The total cash in the firm at the end of the year 2 is $1,240. As of the initial investment, what is the present value of the $1,240 ? 5. How is the present value of the $1,240 related to the present value of the abnormal earnings
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