Question
13) A dollar today is worth more than a dollar to be received in the future because A. a stated rate of return is guaranteed on all investment opportunities B. the dollar can be invested today and earn interest C. inflation will increase the purchasing power of a future dollar D. None of these options are true. 20. 14) Ten years ago, Lucas Inc. earned $0.50 per share. Its earnings this year were S2 What was the growth rate in earnings per share (EPS) over the 10-year period? A.15.17% B.15.97% C.16.77% D.17.61% E18 49% 15) Bob has $2,500 invested in a bank that pays 4% annually. How long will it take for his funds to double? A. 14.39 B. 15.15C. 15.95 D 16.79 E.17.67 16) What is the PV of an ordinary annuity with 10 payments of $2.700 if the appropriate interest rate is 5.5%? A $16,576 B. $17,449 C. $18,367 D. $19.334 E$20,352 17) Your aunt is about to retire, and she wants to selil some of her stock and buy an annuity that will provide her with income of $50,000 per year for 30 years, beginning a year from today. The going rate on such annuities is 7.25% How much would it cost her to buy such an annuity today? A $574,924 B. $605,183 C. $635,442 D.$667,214 E. $700,575 18) Sam was injured in an accident, and the insurance company has offered him the choice of $25,000 per year for 15 years, with the first payment being made today, or a lump sum. If a fair return is 7.5%, how large must the lump sum be to leave him as well off financially as with the annuity? A $225,367 B. $237,229 C. $249,090 D. $261,545 E. $274,622 19) What is the present value of the following cash flow stream at a rate of 6.25%? Years: 0 3 S75 S225 So S300 CFs: SO A. $411.57 B. $433.23 C. $456.03 D. $480.03 E. $505.30 20) An annuity due makes payments and an ordinary annuity makes payments A at the end of each period, at the beginning of each period B. at the end of each period; at the end of each period C. at the beginning of each period; at the end of each period D. at the beginning of each period, at the beginning of each period 21) Your Aunt Ruth has $500,000 invested at 6.5%, and she plans to retire. She wants to withdraw $40,000 at the beginning of each year, starting immediately. How many years will it take her to exhaust her funds? A. 9.00 B. 9.60 C.20.63 D. 22.86 E. 26.58
Explanation / Answer
13) The dollar can be invested and earn interest. - Option B
Todays dollar can be reinvested and can yield a greater amount in the future. Inflation will make the dollar in the future woth less as compared to today.
14) using the rate formula in excel
=RATE(10,0,-0.5,2.2)
= 15.97%
Option B
15) Option D- 17.67
Using NPEr formula
=NPER(4%,0,-2500,5000)
= 17.67
We can also use the 72 rule
72/Rate = nper
= 72/4 = 18
Approx = 17.67
16) Option D - 20352
using the formula of PV in excel
=PV(5.5%,10,2700)
= 20352
Also use the PV formula
= 2700*((1-(1+0.055)^-10)/0.055)
= 20352
17) Option B 605183.13
Using excel formula
=PV(7.25%,30,50000)
= 605183.13
Also use the PV formula
= 50000*((1-(1+0.0725)^-30)/0.0725)
= 605183
18) Option B, 237229
Using PV excel formula
=PV(7.5%,15,25000,0,1)
= 237229
19) Option D
Pv of cash flows
= 75/(1+.0625)^1+225/(1+.0625)^2+0/(1+.0625)^3+300/(1+.0625)^4
= 505.30
20) Option C,
Annuity due makes the payment at the beginning and ordinary annuity makes at end
21) Option D 22.86
=NPER(6.5%,-40000,500000,0,1)
= 22.86
