QUESTION 2.

a. An investment costs $1548 and pays $138 in perpetuity. If the interest rate is 9 percent, what is the net present value? [3 marks]

b. Common stock will pay a cash dividend of $4 next year. After that, the dividends are expected to increase indefinitely at 4 percent per year. If the discount rate is 14 percent, what is the present value of the dividend payments? [3 marks]

c. Peter is investing $5,000 at a stated annual interest rate of 12 percent per year, compounded quarterly, for five years. What is his wealth at the end of five years? [4 mark]