Instructions Complete the following components for 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 risk free U S Treasury security that is expected to earn a nominal interest rate of 9 Economists' consensus forecast for the inflation rate is 5 for the following year to How many shirts can Zane buy today How much money will Zane have at the end of 1 year if he does not purchase the shirts today How much do you think the shirts will cost at the end of the first year in light of expected inflation Use the calculations in parts b) and c) to determine how many shirts (including fractions of shirts) Zane will be able to purchase 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 What is Zane's actual rate of return during the year How is this related t o 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 S1 80 per share The required return on common stock is 12 Calculate the value of the common stock considering each of the following assumptions about the dividend to Dividends are expected to grow at an annual rate of 0 indefinitely Dividends are expected to grow at a constant annual rate of 5 indefinitely Dividends are expected to grow at an annual rate of 5 in each of the next three years, and then to record constant annual growth of 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 preferred stock Its weighted average cost of capital is 10 The following table presents the Active Footwear Division's estimated free cash flow annually from 2013 to 2016 From 2016 onward, the company expects its free cash flow to grow at an annual rate of 4

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Instructions Complete the following components for real and nominal interest rates, common stock valuation, and cash flow. Real and nominal interest rates Zane Perelli currently

Instructions

Complete the following components for 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 risk-free

U.S. Treasury security that is expected to earn a nominal interest rate of 9%. Economists' consensus forecast for the inflation rate is 5%

for the following year.

to. How many shirts can Zane buy today?

How much money will Zane have at the end of 1 year if he does not purchase the shirts today?
How much do you think the shirts will cost at the end of the first year in light of expected inflation?
Use the calculations in parts b) and c) to determine how many shirts (including fractions of shirts) Zane will be able to purchase 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?
What is Zane's actual rate of return during the year? How is this related to 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 S1.80 per share. The required return on common stock is 12%. Calculate the value

of the common stock considering each of the following assumptions

about the dividend:

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

Dividends are expected to grow at a constant annual rate of 5%.
indefinitely.
Dividends are expected to grow at an annual rate of 5% in each of the next three years, and then to record constant annual growth of 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 preferred stock. Its weighted average cost of capital is 10%. The following table presents the Active Footwear Division's estimated free cash flow annually from

2013 to 2016. From 2016 onward, the company expects its free cash flow to grow at an annual rate of 4%.