Reference no: EM132553525
Problem 1: The following stream of cash flows is an example of a(n).
0 10/1 11.664/3 ...
a. ordinary annuity
b. annuity due.
c. constant-payment perpetuity
d. growing perpetuity
Problem 2: You win a $100 million lottery. You are offered two ways in which to receive your winnings:
I. Receive $4 million every year for the next 25 years, with the first payment received today.
II. Receive a one-time lump-sum payment of $27 million today.
Assume that the appropriate discount rate is 15% per year. Which of the above choices would you go with?
a. Choice I
b. Choice II
c. You are indifferent between the two choices
d. Insufficient information provided to decide between the two choices.
Problem 3: The bank offers you a return of 3% per year with monthly compounding on an investment. What is the effective annual rate (EAR) of this investment?
a. 3% per year
b. 3.04% per year
c. 4% per year
a. 36% per year
Problem 4: You estimate that you will need $1 million when you retire in 35 years' time. How much must you invest at the end of every month for the next 35 years if your investment can earn a return of 8% per year?
a. $433.06
b. $5,803.26
c. $2,380.95
d. $435.94
Problem 5: Will your answer to the above question change if you invest at the beginning of each month for the next 35 years?
a. No, it will remain the same.
b. Yes, I will have to invest a larger amount every month.
c. Yes, I will have invest to smaller amount each month.
d. Insufficient information to answer the question.
Problem 6: Why are investors not compensated for diversifiable risk?
a. Because no risky asset has diversifiable risk in the real world.
b. Because all risky assets have only systematic risk in the real world.
c. Because, otherwise, investors can add risk premium without adding more risk.
d. Because investors do not demand any compensation for holding risk.
Problem 7: What is the present value at the end of Year 2 of a lump-sum cash flow of $5,000 that occurs at the end of Year 10? Assume an appropriate discount rate of 12% per year with quarterly compounding.
a. $1,941.69
b. $1,532.78
c. $2,019.42
d. $1,609.87
Problem 8: A stock is expected to pay annual dividends of $3 forever. If you pay $36 to buy this stock today and the first dividend is paid in a year's time, you will earn an annual return of ________ if you hold the stock forever.
a. 12%
b. 8.33%
c. 108%
d. Insufficient information to answer the question.
Problem 9: What is the future value of a 16-year annuity with $216 end-of-month payments if the appropriate interest rate is 4.52% per year?
a. $60,684
b. $3,555
c. $4,915
d. $41,164
Problem 10: You know of an investment opportunity that pays $500 a year for five years and then $800 a year for an additional four years (all end-of-year payments). If you require a 12% rate of return on any investment, what is the maximum amount that you would be willing to pay for the cash flow stream today (i.e. what is the present value)?
a. $5,777
b. $3,181
c. $4,686
d. $4,820
Problem 11: you have borrowed $10000 from a bank a and have promised to repay the loan in five equal annual payments . the first payment is due at the end of the first year. the interest rate on this loan is 10% per year. how much will you owe the bank at the end of the year after the first payment has been made?
Problem 12: continuing with the previous question, right after you make the first payment and loan outstanding is $8362.03, the bank increases the interest rate on your loan to 12% per year. you would still like to pay off the loan in the remaining four years. what is the revised annual payment to the bank?