Complete the following components of real and nominal interest rates,

Common stock valuation and cash flow.

Real and nominal interest rates

Zane Perelli currently has $100 that he can spend on shirts that cost $25 each. Alternatively, you could invest the $100 in a Department of the Treasury security. Risk-free US Treasury, expected to earn a nominal rate of 9% interest. Economists' consensus forecast for the inflation rate it is 5% for the following year.

a. How many shirts can Zane buy today?

b. How much money will Zane have at the end of 1 year if he does not purchase the

shirts today?

c. How much do you think the shirts cost at the end of the first year in light of the

expected inflation?

d. Use the calculations in parts b) and c) to determine how many shirts

(including shirt fractions) will be able to purchase Zane at the end of the first year. In

In percentage terms, how many more, or fewer, shirts can Zane buy per day?

end of the first year? and, What is Zane's actual rate of return during the year? How is it related with the percentage change in Zane's purchasing power calculated in part. d)? Explain your answer.

Common stock valuation

Perry Motors common stock just paid an annual dividend of $1.80 per share. The required return on common stock is 12%. Calculate the value of common shares considering each of the following assumptions

about the dividend:

a. Dividends are expected to grow at an annual rate of 0% indefinitely.

b. Dividends are expected to grow at a constant annual rate of 5%

indefinitely.

c. Dividends are expected to grow at an annual rate of 5% in each of

the next three years, and then there is constant annual growth 4% from the fourth year onwards.

Free Cash Flow Valuation

Erwin Footwear wants to determine the value of its Active Footwear Division. This division has debt with a market value of $12,500,000 and no shares preferential. Its weighted average cost of capital is 10%. The following table presents the free cash flow of the Active Footwear Division estimated annually from 2013 to 2016. From 2016 onwards, the company expects its free cash flow grow at an annual rate of 4%