Question
Sam purchased a stock for $59.74 a share, received a dividend of $2.68 a share and sold the shares for $63.80 each. During the time
Sam purchased a stock for $59.74 a share, received a dividend of $2.68 a share and sold the shares for $63.80 each. During the time he owned the stock, inflation averaged 2.8 percent. What is his approximate real rate of return on this investment?
A. 4.96 percent
B. 8.48 percent
C. 2.16 percent
D. 2.16 percent
E. 8.48 percent
Sam's Motors is a young start-up company that is currently retaining all of its earnings. The company plans to pay a $3 per share dividend in Year 7 and increase that dividend by 2.2 percent per year thereafter. What is the current share price if the required return is 16 percent?
A. $14.29
B. $11.78
C. $8.92
D. $6.62
E. $5.95
Sam's Motors is analyzing two machines to determine which one it should purchase. The company requires a rate of return of 14 percent and uses straight-line depreciation to a zero book value over the life of its equipment. Ignore bonus depreciation. Machine A has a cost of $462,000, annual aftertax cash outflows of $46,200, and a four-year life. Machine B costs $898,000, has annual aftertax cash outflows of $16,500, and has a seven-year life. Whichever machine is purchased will be replaced at the end of its useful life. Which machine should the company purchase and how much less is that machine's EAC as compared to the other machine's?
A. A; $21,146.14
B. B; $22,726.86
C. B; $17,521.94
D. A; $24,321.02
E. A; $27,548.90
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