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Each of the following problems describes an annuity. Determine whether the amount indicated is the annuity’s present value or future value. Also, provide a 1-sentence explanation.
(a) The Belcoda Municipal Electric Company expects that in 5 years’ time, it will need to make significant upgrades to its equipment. In order to set aside enough money to pay these expenses, the utility has begun depositing $98,000 each quarter in to an investment account each quarter. Is the amount they are trying to accumulate a present value or future value?
(b) Otisco County won a judgment against a former contractor that will require the contractor to pay the county $52,000 per year for the next 20 years. Instead of having to make payments for the next 20 years, the contractor offers to pay the county $835,000 in one lump sum immediately. Does the $835,000 amount represent a present value or future value?
(c) Three years ago, Merl bought a new car and borrowed the entire cost. Is the cost of the car the present value of his monthly payments or the future value?
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Summerdahl Resorts' common stock is currently trading at $31.00 per share. The stock is expected to pay a dividend of $1.75 a share at the end of the year (D1 = $1.75), and the dividend is expected to grow at a constant rate of 7% a year. What is the..
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When evaluating an investment for a firm with multiple divisions that each have different risk,
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A stock price is currently $100. Over each of the next two six-month periods it is expected to go up by 12% or down by 6%. The risk-free interest rate is 5%. What is the risk-neutral probability that the stock price will increase each period? (Report..
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