The interest rate is 10%. What is the PV of an asset that pays $1 a year in perpetuity? - ANS $10
The interest rate is 10%. A piece of land produces an income that grows by 5% per annum. If the first year's income is $10,000, what is the value of the land? - ANS $200,000
You a...
The interest rate is 10%. What is the PV of an asset that pays $1 a year in perpetuity? - ANS
$10
The interest rate is 10%. A piece of land produces an income that grows by 5% per annum. If
the first year's income is $10,000, what is the value of the land? - ANS $200,000
You are considering the purchase of one the following two stocks. Both stocks currently sell for
$10 per share and each stock's dividends will grow at rate g forever. Assume you plan to hold
onto the stocks forever (and therefore will receive the dividends forever). Which stock will earn
you the higher annual rate of return from your $10 investment?
Current Price Stock A: $10
Current Price Stock B: $10
Dividend in one year (D1) Stock A: $0.10
Dividend in one year (D1) Stock B: $2.00
Dividend growth rate (g) Stock A: 15% per year in perpetuity
Dividend growth rate (g) Stock B: 1% per year in perpetuity - ANS Stock B is higher;
21%>16%
You are considering the purchase of one the following two stocks. Both stocks currently sell for
$10 per share and each stock's dividends will grow at rate g forever. Assume you plan to hold
onto the stocks forever (and therefore will receive the dividends forever). Which stock will earn
you the higher annual rate of return from your $10 investment?
Current Price Stock A: $10
Current Price Stock B: $10
Dividend in one year (D1) Stock A: $0.10
Dividend in one year (D1) Stock B: $2.00
Dividend growth rate (g) Stock A: 15% per year in perpetuity
Dividend growth rate (g) Stock B: 1% per year in perpetuity
Using a 16% discount rate, what is the PV of a stock that pays a $0.1 dividend at time 1 with
dividends growing at a rate of 15% per year forever? - ANS $10
David and Helen Zhang are saving to buy a boat at the end of five years. If the boat costs
$20,000 and they can earn 10% a year on their savings, how much do they need to put aside at
the end of years 1 through 5? - ANS $3,275.95
, Toby is 65 years of age and has a life expectancy of 12 more years. He wishes to invest
$20,000 in an annuity that will make a level payment at the end of each year until his death. If
the interest rate is 8%, what income can Toby expect to receive each year? - ANS
$2,653.90
Your friend is celebrating her 45th birthday today and wants to start saving for her anticipated
retirement at age 65. She wants to be able to withdraw $10,000 from her savings account on
each birthday for 10 years following her retirement; the first withdrawal will be on her 66th
birthday. Your friend intends to invest her money in the local savings and loan, which offers 8
percent return per year. She wants to make equal, annual payments on each birthday for her
retirement fund. If she starts making these deposits on her 46th birthday and continues to make
deposits until she is 65 (the last deposit will be on her 65th birthday), what amount must she
deposit annually to be able to make the desired withdrawals on retirement? - ANS
$1,466.30
Your friend is celebrating her 45th birthday today and wants to start saving for her anticipated
retirement at age 65. She wants to be able to withdraw $10,000 from her savings account on
each birthday for 10 years following her retirement; the first withdrawal will be on her 66th
birthday. Your friend intends to invest her money in the local savings and loan, which offers 8
percent return per year. She wants to make equal, annual payments on each birthday for her
retirement fund.Suppose your friend has just inherited a large sum of money. What amount
would she have to deposit if she decides to make one lump-sum payment today? - ANS
$14,396.36
NPV method - ANS accept all projects with a positive NPV
IRR method - ANS accept all projects with an IRR greater than the project's opportunity
cost of capital (OCC)
Payback rule - ANS a project should be accepted if payback period is less than cutoff
period
A project has a $9,000 initial investment and is expected to produce $1,000 cash flows every
year in perpetuity, starting at time 3. What is the net present value (NPV) of this perpetual
project using a 6% discount rate (i.e., the opportunity cost of capital is 6%)? Should you accept
this project? - ANS NPV= $5,833.28
Yes, NPV>0
•You can purchase a turbo-powered machine tool gadget for $4,000. The investment will
generate $2,000 and $4,000 in cash flows for two years, respectively. What is the IRR on this
investment?If the cost of capital is 20%, will you undertake the project? - ANS IRR=
28.08%
Yes
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