2.A friend has started a business selling software. The software is a greathit, and the firm quickly grows large enough to sell stock. Your friend's firm promisesto pay a dividend of $5 per share every year for the next 50 years, at which point yourfriend intends to shut down the business. The firm's stock is currently selling for $75per share. If you believe that the company really will pay dividends as stated and ifyou require a 10% rate of return to make this investment, should you buy the stock?Briefly explain.

Present value of an annuity is given as: => P = C *{1 - (1+r)-tr}P : Present value C : per year…

Answered: 2. A friend has started a business…

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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2.
A friend has started a business selling software. The software is a great
hit, and the firm quickly grows large enough to sell stock. Your friend's firm promises
to pay a dividend of $5 per share every year for the next 50 years, at which point your
friend intends to shut down the business. The firm's stock is currently selling for $75
per share. If you believe that the company really will pay dividends as stated and if
you require a 10% rate of return to make this investment, should you buy the stock?
Briefly explain.

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Introduction

$P r e s e n t v a l u e o f a n a n n u i t y i s g i v e n a s : = > P = C * {\frac{1 - {(1 + r)}^{- t}}{r}} P : P r e s e n t v a l u e C : p e r y e a r f i x e d p a y m e n t (a n n u i t y) r : p e r a n n u m r a t e o f r e t u r n t : t o t a l n u m b e r o f y e a r s i n v o l v e d$

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