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QQ is a constantly growing company that has just paid an annual dividend of $3.28. The share is priced at a market capitalization rate of

QQ is a constantly growing company that has just paid an annual dividend of $3.28. The share is priced at a market capitalization rate of 8.1%. The share price is $112.30. Its payout ratio is 0.6.

  1. The only asset of a small firm is an old oil well. Currently the shares are valued at a market capitalization rate of 10%. The growth rate of dividends is negative and is expected to remain so indefinitely. The share price is therefore expected to gradually fall. Why would anyone buy the shares of this firm if the share price is expected to drop? [4]
  2. In a general cash offer, what would be the advantages of underpricing by a very small amount? [2]
  3. In a general cash offer, what would be the advantages of underpricing by a very large amount? [2]

A company is considering a project that requires an immediate investment of $150,000. This project is expected to generate return for the next ten years. The expected cash inflow at t=1 will be $10,000 and the expected cash flows for the following 9 years are $22,000 each yr. The firm expects to salvage the equipment used for $38,000 when the prject is terminated inten years. Determine the NPV.

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