1. You receive $500 now, $550 in year 1, $600 in year 2, $650 in year 3, and so on, until the final payment of $900. Find the present value of these payments at time 0 if EAR= 5%.
2. Suppose that we know that IBM and DELL are going to pay a liquidating dividend in exactly one year, and this is the only payment that they will make. However, the dividend that IBM and DELL pay is uncertain and depends on how well the economy is doing. If the economy is in an expansion, then IBM will pay a dividend of 140, while DELL will pay a dividend of 160. However, if the economy is in a recession, then IBMís dividend will be 100, while DELLís dividend will be only 80. The two states are equally likely. Thus, both Örms are exposed to the business cycle factor. The factor loading of IBM on the business cycle factor is bIBM;BC = 0:4, while the factor loading of DELL is bDELL;BC = 0:8889. Suppose that the risk-free in the economy is 5%. If IBM stock price is $100, how much are you willing to pay for DELL stock?