Taxation

a.The In-Tech Co. just paid a dividend of \$1 per share. Analysts expect its dividend to grow at 25% per year for the next three years and then 5% per year thereafter.

If the required rate of return on the stock is 18%, what is the current value of the stock?
b. Project Y has following cash flows: C0 = -800, C1 = +5,100, and C2 = -5,100. Calculate the IRRs for the project.
c. A firm has a general-purpose machine, which has a book value of \$300,000 and is worth \$500,000 in the market. If the tax rate is 20%, what is the opportunity cost

of using the machine in a project?
d. Stock M and Stock N have had the following returns for the past three years: 12%, -10%, 32%; and 15%, 6%, 24%, respectively. Calculate the covariance between the

two securities. (Ignore the correction for the loss of a degree of freedom.)

Sample Solution

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