QUESTION 3 You are trying to evaluate the economics of purchasing an apartment. You expect the apartment to provide annual after-tax cash benefits of US$6,000 at the end of each year. You intend to sell the apartment at the end of the fifth year of ownership to obtain after-tax proceeds of US$100,000 so you can invest in an apartment building. Assume the funds for purchasing the apartment will be drawn from your savings account which is currently earning 2% after taxes and that inflation rate is currently 5%. a) Identify the cash flows, their timing and the required rate of return applicable to valuing investing in the apartment? b) Showing all calculations state if you should purchase the apartment if the seller is selling the apartment for US$200,000, justify your decision? What is the maximum price you would be willing to pay to acquire the apartment? c) Assume at the end of Year 1 you are considering investing the after-tax cash benefits of US$6000 in Festige Holdings a mature firm in the food and beverage industry. The firm's most recent common stock dividend was US$5.00 per share. Because of the firm's maturity and stable sales and earnings, firm's management feels that dividends will remain at the current level for the foreseeable future. If the required return on similar type shares is 7% what will be the value of Festige Holdings shares and how many shares should you purchase.
QUESTION 3 You are trying to evaluate the economics of purchasing an apartment. You expect the apartment to provide annual after-tax cash benefits of US$6,000 at the end of each year. You intend to sell the apartment at the end of the fifth year of ownership to obtain after-tax proceeds of US$100,000 so you can invest in an apartment building. Assume the funds for purchasing the apartment will be drawn from your savings account which is currently earning 2% after taxes and that inflation rate is currently 5%. a) Identify the cash flows, their timing and the required rate of return applicable to valuing investing in the apartment? b) Showing all calculations state if you should purchase the apartment if the seller is selling the apartment for US$200,000, justify your decision? What is the maximum price you would be willing to pay to acquire the apartment? c) Assume at the end of Year 1 you are considering investing the after-tax cash benefits of US$6000 in Festige Holdings a mature firm in the food and beverage industry. The firm's most recent common stock dividend was US$5.00 per share. Because of the firm's maturity and stable sales and earnings, firm's management feels that dividends will remain at the current level for the foreseeable future. If the required return on similar type shares is 7% what will be the value of Festige Holdings shares and how many shares should you purchase.
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Transcribed Image Text:QUESTION 3
You are trying to evaluate the economics of purchasing an apartment. You expect the
apartment to provide annual after-tax cash benefits of US$6,000 at the end of each year.
You intend to sell the apartment at the end of the fifth year of ownership to obtain after-tax
proceeds of US$100,000 so you can invest in an apartment building. Assume the funds for
purchasing the apartment will be drawn from your savings account which is currently
earning 2% after taxes and that inflation rate is currently 5%.
a) Identify the cash flows, their timing and the required rate of return applicable to
valuing investing in the apartment?
b) Showing all calculations state if you should purchase the apartment if the seller is
selling the apartment for US$200,000, justify your decision? What is the maximum
price you would be willing to pay to acquire the apartment?
c) Assume at the end of Year 1 you are considering investing the after-tax cash benefits
of US$6000 in Festige Holdings a mature firm in the food and beverage industry.
The firm's most recent common stock dividend was US$5.00 per share. Because of
the firm's maturity and stable sales and earnings, firm's management feels that
dividends will remain at the current level for the foreseeable future. If the required
return on similar type shares is 7% what will be the value of Festige Holdings shares
and how many shares should you purchase.
d) If your required rate of return on both investments is 7% which between the two
should you invest? Please provide reasons for your answer
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