Assume that today is 1/1/18. Assume that you expect the following cash flows of EL, INC.

CASH FLOWS

1/1/18 1/1/19 1/1/20 1/1/21 1/1/22

$4 $5 $0 $8

Assume that you will buy one share today (1/1/18) and sell your one share 3 years from today (1/1/21). How much do you expect to sell your one share for on 1/1/21? Assume that these are all of the cash flows that EL will produce. Also assume that a fair rate of return for an investment of like risk is 8%. Please put your answer on the blank line on the answer sheet. Please record your answer in dollars and cents.

Expert Solution

buy one share today (1/1/18) and sell the one share 3 years from today (1/1/21)

selling share on 1/1/21 on this date the future cash flows is $8(1/1/22)

Discounting this cash flow with rate of return for an investment (8%) to the present value on (1/1/21)

PV = FV / (1+i)ⁿ

= 8 / (1+0.08)¹

= 8 / 1.08

= $7.41

jeff jeffy answered 2 years ago

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