Question

1....The treasurer of ABC Imports expects to invest $3,000 of the firm's funds in a long-term investment vehicle at the end of each month for the next 2 years. He expects that the company will earn 8% interest that will compound monthly. The value that these payments should have at the end of the 2-year period is calculated as: Select one: a. $77,799.57 b. $102,436.10 c. $53,811.37 d. $75,206.25 e. $171,269.61

2.... If I want to buy a new computer 5 years from now that will cost $11,017 how much do I have to invest today at 9% interest? Select one: a. $7,160 b. $7,232 c. $7,518 d. $7,017 e. $7,662

3..... If dividends are expected to grow at 8% annually and the appropriate cost of equity is 12%, what is the value of a stock with an expected annual dividend of $2.53? Select one: A. $62.88 B. $63.25 C. $29.12 D. $58.25

4.... Which is a characteristic of preferred stock? I. It is considered to be a perpetuity II. Dividend payments are tax deductible III. It typically pays semi-annual dividends Select one: A. I only B. I and II only C. I and III only D. I, II, and III

Answer 1

Answer to Question 1:

Monthly Deposit = $3,000
Time Period = 2 years or 24 months

Annual Interest Rate = 8.00%
Monthly Interest Rate = 8.00% / 12
Monthly Interest Rate = 0.6667%

Accumulated Sum = $3,000*1.006667^23 + $3,000*1.006667^22 + … + $3,000*1.006667 + $3,000
Accumulated Sum = $3,000 * (1.006667^24 - 1) / 0.006667
Accumulated Sum = $3,000 * 25.93329
Accumulated Sum = $77,799.57

Answer to Question 2:

Future Value = $11,017
Time Period = 5 years
Interest Rate = 9%

Present Value = Future Value / (1 + Interest Rate)^Time Period
Present Value = $11,017 / 1.09^5
Present Value = $7,160

Answer to Question 3:

Expected Dividend = $2.53
Cost of Equity = 12.00%
Growth Rate = 8%

Stock Price = Expected Dividend / (Cost of Equity - Growth Rate)
Stock Price = $2.53 / (0.12 - 0.08)
Stock Price = $63.25

Answer to Question 4:

Characteristics of preferred stock are:
It pays annual dividend as perpetuity
Dividend are not tax deductible.

Therefore, only A is correct.