Question 1

A preferred stock offers a rate of return of 5.45 percent and sells for $78.20? What is the annual dividend amount?

Accepted Answer

The annual dividend amount is $4.26. This is calculated by multiplying the rate of return (5.45%) by the stock price ($78.20).

Question 2

Standards Life Insurance offers a perpetuity that pays annual payments of $12,000.This contract sells for $250,000 today.What is the interest rate?

Accepted Answer

The interest rate for a perpetuity is calculated as the annual payment divided by the price of the perpetuity. Here, $12,000 / $250,000 = 0.048, or 4.80 percent.

Question 3

Round House Furniture offers credit to its customers at a rate of 1.15 percent per month.What is the effective annual rate of this credit offer?

Accepted Answer

The effective annual rate (EAR) can be calculated using the formula: EAR = (1 + periodic rate)^n - 1, where the periodic rate is 0.0115 (1.15% per month) and n is 12 (months in a year). EAR = (1 + 0.0115)^12 - 1 = 0.1471 or 14.71%.

Question 4

At the end of this month, Les will start saving $200 a month for retirement through his company's retirement plan.His employer will contribute an additional $.50 for every $1.00 that he saves.If he is employed by this firm for 30 more years and earns an average of 8.25 percent on his retirement savings, how much will he have in his retirement account 30 years from now?

Accepted Answer

The answer of At the end of this month, Les...

Question 5

What is the value today of $3,600 received at the end of each year for eight years if the first payment is paid at the end of Year 4 and the discount rate is 12 percent?

Accepted Answer

The correct answer is C. The present value of the annuity is $12,729.12. This is calculated by multiplying the annual payment of $3,600 by the present value factor for an annuity due of 8 years at 12%, which is 3.5384.

Question 6

A local magazine is offering a $5,000 grand prize to one lucky winner.The prize will be paid in five annual payments of $1,000 each, starting one year after the drawing.How much would this prize be worth to you if you can earn 8 percent on your money?

Accepted Answer

The present value of the prize is calculated using the formula for the present value of an annuity. The present value of $1,000 received annually for 5 years at an 8% interest rate is approximately $3,992.71.

Question 7

You plan to save $200 a month for the next 24 years and hope to earn an average rate of return of 10.6 percent.How much more will you have at the end of the 24 years if you invest your money at the beginning rather than the end of each month?

Accepted Answer

The answer of You plan to save $200 a month...

Question 8

Anne plans to save $40 a week, starting next week, for ten years and earn a rate of return of 4.6 percent, compounded weekly.After the ten years, she will discontinue saving and invest her account at 6.5 percent, compounded annually.How long from now will it be before she has accumulated a total of $50,000?

Accepted Answer

The answer of Anne plans to save $40 a week,...

Question 9

A preferred stock pays an annual dividend of $2.95.What is one share of this stock worth to you today if you require a rate of return of 8.2 percent?

Accepted Answer

The answer of A preferred stock pays an annual dividend...

Question 10

Kristina started setting aside funds three years ago to save for a down payment on a house.She has saved $900 each quarter and earned an average rate of return of 4.8 percent.How much money does she currently have saved?

Accepted Answer

The correct answer is A.The amount of money Kristina has saved can be calculated using the formula for the future value of an annuity:FV = P * [(1 + r/n)^(n*t) - 1] / (r/n)where:P is the amount of money saved each quarter ($900)r is the annual rate of return (4.8%)n is the number of times per year that the money is saved (4)t is the number of years that the money has been saved (3)Plugging these values into the formula, we get:FV = 900 * [(1 + 0.048/4)^(4*3) - 1] / (0.048/4)= 900 * [(1.012)^12 - 1] / 0.012= 900 * [1.136 - 1] / 0.012= 900 * 0.136 / 0.012= 11,542.10Therefore, Kristina currently has $11,542.10 saved.

Question 11

First Bank offers personal loans at 7.7 percent compounded monthly.Second Bank offers similar loans at 7.4percent compounded daily.Which one of the following statements is correct concerning these loans? Assume a 365-day year.

Accepted Answer

The answer of First Bank offers personal loans at 7.7...

Question 12

Uptown Insurance offers an annuity due with semiannual payments for 25 years at 6 percent interest.The annuity costs $200,000 today.What is the amount of each annuity payment?

Accepted Answer

The correct answer is A.The formula for the present value of an annuity due is:PV = PMT * [1 - (1 + r)^-n] / rwhere:PV is the present value of the annuityPMT is the amount of each annuity paymentr is the interest rate per periodn is the number of periodsIn this case, we have:PV = $200,000r = 6% / 2 = 3% per periodn = 25 * 2 = 50 periodsSubstituting these values into the formula, we get:$200,000 = PMT * [1 - (1 + 0.03)^-50] / 0.03PMT = $7,546.70Therefore, the amount of each annuity payment is $7,546.70.

Question 13

Freya plans to invest $3,200 a year for 25 years starting at the end of this year.How much will this investment be worth at the end of the 25years if she earns an average annual rate of return of 8.2 percent?

Accepted Answer

The answer of Freya plans to invest $3,200 a year...

Question 14

You will receive annual payments of $800 at the end of each year for 12 years.The first payment will be received in Year 3.What is the present value of these payments if the discount rate is 7 percent?

Accepted Answer

The answer of You will receive annual payments of $800...

Question 15

You would like to establish a trust fund that would provide annual scholarships of $100,000 forever.How much would you have to deposit today in one lump sum to achieve this goal if you can earn a guaranteed 4.5 percent rate of return?

Accepted Answer

To provide perpetual scholarships of $100,000 with a 4.5% return, you need to deposit an amount equal to the scholarship divided by the rate of return: $100,000 / 0.045 = $2,222,222.

Question 16

Assume your university earns an average rate of return of 5.65 percent on its endowment funds.If a new gift permanently increases annual scholarships by $32,000, what was the amount of the gift?

Accepted Answer

The answer of Assume your university earns an average rate...

Question 17

Kurt will receive $1,200 a month for five years from an insurance settlement.The first payment was received today.If he invests the full amount of each payment at a guaranteed 6.15 percent rate, how much will he have saved at the end of the five years?

Accepted Answer

The answer of Kurt will receive $1,200 a month for...

Question 18

What is the effective annual rate of 8.25 percent compounded quarterly?

Accepted Answer

The effective annual rate (EAR) can be calculated using the formula: EAR = (1 + i/n)^(n*t) - 1, where i is the nominal rate (8.25%), n is the number of compounding periods per year (4 for quarterly), and t is the number of years (1 year). Plugging in the values, EAR = (1 + 0.0825/4)^(4*1) - 1 = 8.51%.

Question 19

What is the effective annual rate of 9.6 percent compounded semiannually?

Accepted Answer

The effective annual rate (EAR) can be calculated using the formula: EAR = (1 + i/n)^(n*t) - 1, where i is the nominal rate (9.6%), n is the number of compounding periods per year (2 for semiannual), and t is the number of years (1 year). Plugging in the values, EAR = (1 + 0.096/2)^(2*1) - 1 = 0.0983 or 9.83%.

Question 20

Leann will receive $ 95,000 a year for 7years, starting today.If the rate of return is 6.8 percent, what are these payments worth today?

Accepted Answer

The answer of Leann will receive $ 95,000 a year...

Quiz 5: Discounted Cash Flow Valuation