TIPLE CHOICE Choose the one alternative that estcompetes the meto 1) In comparin
ID: 2783284 • Letter: T
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TIPLE CHOICE Choose the one alternative that estcompetes the meto 1) In comparing an ordinary amuiry and anan A) The future value of an areuity doe is B) The future value of an ordinary wity is always greater han de otherwise identical anmaity due C) All things being epal,one would preter to mcetve an ondinary ey o D) The future value of an annuity due is always greater than the future wahon of an identical ordinary anmuity 2) You have been offered a project paying S250 at the beguningofeach y what is the maximum amount of money you would invest inthus pro loc ctidl you -20- rate of return to your investment? A) $ 2,985 B) $ 6,000 C)s 2651 3) Joe owns a corporate bond with a coupon rate of 8% that matures in 10 years. Mary corporate bond with a coupon rate of 12% that matures in 25 years li indetevi rates pdow A) the value of Joe's bond will decrease and the value of Mary's bond wil increase B) the value of both bonds will increase C) the value of both bonds will remain the same because they were both purchased in time period before the interest rate changed value of Mary's bond win decrease more than the value of ,bond due to time to maturity 4) A college received a contribution to its endowment fund of $2 million. It can never tou principal, but can use the earnings. At an assumed interest rate of 4.5 percent, how m college earn to help its operations each year? A) $93,000 B) $45,000 C) $90,000 5) AB Corp. pays a dividend of $3 per share. The dividend is expected to grow at a c 4% per year. If AB Corp. stock is selling for S50.00 per share, the stockholders, eg return is B) 16.50%. C) 10.00%. A) 15.49%. 6) A bond issued by Smith Inc. 10 years ago has a coupon rate of 7% and a face vs bond will mature in 15 years. What is the value to an investor with a required B) $701 C) $925 A) $837 the constant growth di 7) Which of the following statements concerning true? A) The growth rate must increase every year. B) The required rate of return must exceed the growth rate. C) The required rate of return must be equal to the D) The dividend growth rate must be bigger growth rate for div than 8%Explanation / Answer
1) In an ordinary annuity, the payment comes always at the end of the term whereas in case of annuity due, the payment comes at the beginning of the term. Due to time value of money, a sum of money today is worth more than the same sum in the future, As a result, the value of annuity due is always more than the value of ordinary annuity because use receive payments earlier in an annuity due than an ordinary annuity. So, Option D is correct.
2) The cash inflows will be at the beginning of each year that means starting at Y0 and for more 19 more years (Y1, Y2, Y3...). The Present value factor at Y0 is always 1 at any rate of interest. Therefore, the present value factor to be used would be -
PVF = 1 + Cumulative PVF (8%, 19 years) = 1 + 9.60359919936 = 10.60359919936
Maximum amount to be paid would be equal to the present value of cash inflows -
Maximum amount to be paid = $250 x 10.60359919936 = $2,651 (Option c)
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