Consider the following investment/dividend opportunities facing a company:
Assume that the interest rate in the capital market is 12 per cent per period,and that the company has four equal shareholders (A,B,C and D).Also assume the company has chosen Projects Normal and Mega for investment.Suppose Shareholder B wishes to consume $165 now.What is his required repayment in the later period?

Question

Consider the following investment/dividend opportunities facing a company: 
Assume that the interest rate in the capital market is 12 per cent per period,and that the company has four equal shareholders (A,B,C and D).Also assume the company has chosen Projects Normal and Mega for investment.Suppose Shareholder B wishes to consume $165 now.What is his required repayment in the later period?

Quizplus · Accepted Answer

To determine the required repayment in the later period, we need to calculate the present value of B's consumption using the interest rate of 12 per cent per period.

PV = FV / (1 + r)n

Where PV is the present value, FV is the future value, r is the interest rate, and n is the number of periods.

In this case, B wishes to consume $165 now, so the future value is $165. The number of periods is not given, so we'll assume it's one period (since B wants to consume now and repay later).

PV = 165 / (1 + 0.12)

PV = 147.32

So B needs to repay $147.32 in the later period.

Now, let's look at the investment opportunities.

Project Normal has a net present value (NPV) of $100 and a dividend of $50 per period.

Project Mega has a NPV of $200 and a dividend of $70 per period.

Since the shareholders hold equal shares, each shareholder's share is 25% of the total investment.

Here's the calculation for each project:

Project Normal:

NPV: $100 x 0.25 = $25

Dividend: $50 x 0.25 = $12.50

Total: $37.50

Project Mega:

NPV: $200 x 0.25 = $50

Dividend: $70 x 0.25 = $17.50

Total: $67.50

Therefore, the best choice is Project Mega with a total return of $67.50.

Consider the Following Investment/dividend Opportunities Facing a Company