Question

Question 61

You are going to withdraw $1,025 at the end of each year for the next three years from an account that pays interest at a rate of 7% compounded annually. The account balance will reduce to zero when the last withdrawal is made. How much money will be in the account immediately after the second withdrawal is made?

Select one or more:

a. $1,000.00

b. $2,000.00

c. $934.60

d. $925.93

e. $957.94

Question 62

If the rate at which you can invest is positive, the future value of $1 received today is more than $1.

Select one:

True

False

Question 63

The Johnson Company just paid an annual dividend of $1.85. How much would you be willing to pay for one share of Johnson Company stock if the dividend remains constant and you require a 9.5% rate of return?

Select one:

a. $19.47

b. $18.95

c. $17.78

d. $16.84

e. $16.00

Question 64

What is the market value of a bond that will pay a total of 21 annual coupons of $90 each over the remainder of its life? Assume the bond has a $1,000 face value and an 8%/year yield to maturity.

Select one:

a. $1,135.90

b. $1,100.17

c. $1,196.36

d. $1,192.07

e. $634.86

Question 65

For a project with an initial investment of $38,000 and cash inflows of $10,500 a year for five years, calculate NPV given a required return of 10.5%/year.

Select one:

a. $1,699

b. $1,103

c. $1,171

d. $655

e. $1,300

Answer 1

61)

e.

$     957.94

Working:

The account balance will have present value of annual withdrawl at any time.

Present Value

=

Balance annual wihdrawl x discount factor

=

$       1,025

x

(1.07^-1)

=

$     957.94

62)

True

Working:

Future Value of any amount will be more than that amount if it has positive investment has positive rate.

Suppose investment rate is 5%,

Futue Value

=

Present Value x (1+interest rate)^Year

=

$ 1 x (1+0.05) ^ 1

=

$         1.05

Thus, Future Value of investment is more than $ 1.

63)

a.

$       19.47

Working:

Current Price of Stock

=

Annual Dividend/Required return

=

$       1.85

/

9.50%

=

$    19.47

64)

b.

$ 1,100.17

Price of bond is the present value of cash flow.

Period

Cash flow

Discount factor

Present Value

1-21

$       90.00

10.0168

$     901.51

21

$ 1,000.00

0.1987

$     198.66

Price of Bond

$ 1,100.17

Woring:

Present Value of annuity of 1

=

(1-(1+i)^-n)/i

Where,

=

(1-(1+0.08)^-21)/0.08

i

8%

=

10.0168

n

21

Present value of 1

=

(1+i)^-n

=

(1+0.08)^-21

=

0.1987

65)

e.

$       1,300

Working:

Present Value of annuity of 1

=

(1-(1+0.105)^-5)/0.1050

=

3.7429

Present value of annual cash flow

10500

x

3.7429

=

$       39,300

Less:Cost of Investment

$       38,000

NPV

$         1,300