Expected Value and Perpetuity Problems Set

Expected Value and Perpetuity Problems Set

1. When your company’s Career Resource Center opens, your research indicates that its Net Present Value has a 60% chance of being $72,000.  This NPV considers the present value of a decrease in turnover costs due to the center of $112,000 minus the present value of costs to stock and staff it as and the annual depreciation on the equipment over the project’s term.  The present value of all these costs totals $40,000.

PV Cash Inflows – PV Cash Outflows = NPV

$112,000 – $40,000 = $72,000.

But the center also has a 40% chance of barely breaking even with the present value of the reduction of turnover being $42,000 and the present value of costs still the amounts listed above.

Given the possible outcomes and their probabilities, what is the expected outcome of the Net Present Value for the Career Resource Center project?

Formula = Σ (p × Scenario NPV)

whereby, Scenario NPV is the NPV under a specific scenario while p stands for the probability of occurrence of each scenario.

Expected Outcome of NPV = $ 44,000

1. What is the expected value of the Return on Investment of investing in the succession management software under the conditions described below.

Scenario                                                                                  Probability

1. Software is widely used and improves company performance by $250,000. 15% 
2. Software is moderately successful and improves performance by $75,000. 40%
3. Software does not improve performance as revenue equal expenses .         25%
4. Damage control loses company money in the amount of $124,000. 20%

Expected gains from the investment =250000*15% + 75000*40% + 0*25% – 124000*20%
=$42,700

Preferred Stock Valued as a Perpetuity

1. Facebook issued $5 million of 7% preferred stock at $100 per share.  $7.00 is the fixed, annual dividend per share.  If an investor requires a 10% return on Facebook preferred shares, what is the value is of the preferred stock per share?

Applying the concept of present value of a perpetuity,

Facebook Value of preferred stock shares

 = Annual Dividend / Required Rate

 = 7 / 10%

 = $70 per share

1. Hershey Chocolate Company issued $1 million of 5.50% preferred stock at $70 per share. 

   a) What is the fixed, annual dividend per share on each of these shares? 
      

Annual dividend= Dividend rate X Par value

 = 5.50% x 70

 = $3.85

4. b) If an investor requires a 4.50% return on Hershey, what is the value is of the preferred stock
   per share?
   Value per share = Dividend / Rate

= 3.85 / 4.50%

= $85.60

To get solutions for Expected Value and Perpetuity Problems Set, please click on https://academicessayist.com/orders/ordernow

PLACE THE ORDER WITH US TODAY AND GET A PERFECT SCORE!!!