Problem 2 Answer any two (Time Value of Money, Stock Valuation and Capital Budgeting Techniques)

Johnson Signs Inc. has been able to increase dividends at the rate of 2% per year since the company first started paying dividends in 1957. Johnson has developed a new production technique and can sell their signs at a premium price for the next three years. This immediate revenue boost will allow Johnson to increase dividends at a rate of 12% per year next year, then 10% the following year, and 8% the next year. After that, they intend to revert to their previous slow but steady increase in annual dividends. If current dividends are K2.45 per share and Johnson investors require an annual rate of return of 11%, what is the intrinsic vALUE per share for the company's stock?

Your plans for the future have finally materialized because you have won the lottery. Congratulations! The lottery marketing material says you have won K20, 000,000 but a more careful examination of the terms and conditions means that you have won twenty K1, 000,000 beginning-of-the-year cash flows with the first cash flow today. Further, the lottery contract says that instead of waiting for so many years to collect your winnings, you could accept a lump sum check today in the amount of K12, 000,000. If you determine that the appropriate interest rate to compare these two alternatives is 6%, which alternative is preferred?

What is the Net Present Value (NPV) and IRR for the cash flows provided in the table below? Note: The negative cash flow for year 0 is the initial investment for the project. The required rate of return is 8%.

Year	Cash Flow
0	-K100,000
1	K40,000
2	K40,000
3	K40,000