Essay 05

• You are the lucky winner of a design of the competition. You will receive RM100,000 today and will receive 20 annual payments of RM50,000. This payment will start one year from now. A representative from the competition has offered to purchased all your payments from you for RM1 million. If the appropriate interest rate is 9%, should you take the offer?

• Phillip Lighting Co. currently pays no dividend. The company is anticipating dividends of RM0, RM0, RM0, RM0.10, RM0.20, and RM0.30 over the next 6 years respectively. After that the company anticipates increasing the dividend by 4% annually. What is the value of its stock today?

• The value of the firm is maximized by taking on as much debt as possible. Show graphically how adding debt can increase value through the overall cost of capital. Explain under what conditions this impacts the cost of capital and translate into the firm value.