Question

a. Martin wants to provide money in his will for an annual bequest to whichever of his living relatives is oldest. That bequest will provide $6,000 in the first year, and will grow by 7% per year, forever. If the interest rate is 10%, how much must Martin provide to fund this bequest?

A. $100,000

B. $240,000

C. $160,000

D. $200,000

B. Valence Electronics has 201 million shares outstanding. It expects earnings at the end of the year of $730 million. Valence pays out 40% of its earnings in total - 15% paid out as dividends and 25% used to repurchase shares. If Valence's earnings are expected to grow by 5% per year, these payout rates do not change, and Valence's equity cost of capital is 9%, what is Valence's share price?

A. $5.45

B. $36.32

C.$29.06

D.$10.90

Answer 1

Q-a)

Calculating the amount need to be provided to fund this​ bequest:-

Present value = Annual Cashflow/(Interest rate - Growth Rate)

Present value = $6000/(0.10-0.07)

Present value = $200,000

So, the amount must Martin provide to fund this​ bequest is $200,000

Option D

Q-B)

Earnings at the end of year = $730 million

Total payout = 40%

Total Payout Amount = $730 million*40% = $292 million

calculating the Total value of Shares of Valence:-

Total value of Shares= Total Payout Amount/(equity Cost of capital - Growth rate)

Total value of Shares = $292 million/(0.09-0.05)

Total value of Shares = $7300 million

- Price per share = Total value of Shares/No of shares outstanding

Price per share = $7300 million/201 million

Price per share = $36.32

Option B