• Complete the following components of real and nominal interest rates, valuatio

• Complete the following components of real and nominal interest rates, valuation, common stock and cash flow.
• Include bibliographical references in the writing.
Real and nominal interest rates
Zane Perelli currently has $100 that he can spend on shirts that cost $25 each. Alternatively, he could invest the $100 in a Department of Treasury security.
Risk-free US Treasury expected to earn nominal rate 9% interest. Economists’ consensus forecast for the rate of
inflation is 5% for the following year.
to. How many shirts can Zane buy today?
b. How much money will Zane have at the end of 1 year if he does not make the purchase of the shirts today?
c. How much do you think the shirts cost at the end of the first year in light of expected inflation?
d. Use the calculations in parts b) and c) to determine how many shirts (including shirt fractions) will be able to purchase Zane at the end of the first year.
In percentage terms, how many more or fewer shirts can you buy?
Zane at the end of the first year? and. What is Zane’s actual rate of return during the year? How is it related with the percentage change in Zane’s purchasing power calculated in part d)?
F. Explain your answer.
Common stock valuation
Perry Motors common stock just paid an annual dividend of 1.80 per share. The required return on common stock is 12%.
Calculate the value of the common stock by considering each of the following dividend assumptions:
to. Dividends are expected to grow at an annual rate of 0% indefinitely.
b. Dividends are expected to grow at a constant annual rate of
5% indefinitely.
c. Dividends are expected to grow at an annual rate of 5% on each of the following three years, and then there is annual growth constant 4% from the fourth year onwards.
Free Cash Flow Valuation
Erwin Footwear wants to determine the value of its Active Footwear Division. This division has debt with a market value of $12,500,000 and no shares preferential. Its weighted average cost of capital is 10%. The following table
presents the free cash flow of the Active Footwear Division estimated annually from 2013 to 2016. From 2016 onwards, the company expects its free cash flow grow at an annual rate of 4%.