(a). Suppose I want to be able to withdraw K5,000 at the end of five years and withdraw K6,000 at the end of six years , leaving a zero balance in the account after the last withdrawal. If I can earn 5% on my balances, how much must I deposit today to satisfy my withdrawal needs?
(b). Big Joe Company has a perpetual preferred stock issue that pays a 15% dividend. The par value of each share is K85. The stocks are currently trading for K90. The going rate of interest in the market is 12%. Which of the following statements is true for this stock? Show calculations.
1. The market rate is less than the stock’s expected rate of return and it should be purchased.
2. The market rate is less than the stock’s expected rate of return and it should not be purchased.