Multi-part Question

1.1.1: 1 year ago, at time 0, a company named Financing Lousy Projects (FLoP) was expected to yield a cash-flow of FL 600.000 per year, starting at year 1 and viewed s a perpetuity growing at the yearly rate of 2%; cash-flows are expressed in terms of the currency of the Country where FLoP operates - henceforth FLoPcurrency or FL. FLoP was (and still is) entirely equity-financed, and its equity rate of return was (and still is) equal to 14%.

However, the year-1 cash-flow turned out to be equal to FL 450.000, and the expected year 2-cash flow has been revised to FL 530.000. The yearly growth rate of the cash-flow has also been revised to 1%. The dividend was entirely paid out to the shareholders.

Which was the actual rate of return realized by the shareholders of FLoP between time 0 and time 1, in terms of the FLoP currency?

1.1.2: Consider an investor who at time 0 converted a sum in Swedish Crowns into the FLoP-currency to acquire an equity-participation in FLoP. At that time, SEK 5 were traded against 1 unit of the FLoP-currency, whereas todays exchange rate is equal to SEK 4.8 per unit of the FLoP-currency.

What is the rate of return realised by the investor between year 0 and year 1, in terms of Swedish Crowns?