Question

In: Finance

1. What's the present value of a $4,500 lump sum that you expect to receive at...

1. What's the present value of a $4,500 lump sum that you expect to receive at the end of 5 years if the discount rate is 4.5% per annum, compounded semiannually?

A. $3,602.30

B. $4,178.66

C. $3,270.59

D. $4,358.78

E. $3,566.27

2. In capital budgeting the cash flows that will occur if and only if a company decides to accept and invest in a project are called ________ cash flows.

A. constant

B. incremental

C. mutually exclusive

D. sunk

E. depreciation

3. A company has perpetual preferred stock outstanding with an annual dividend of $4.00 per share. The amount of the dividend will remain constant in the future. If the required return is 6.5% per annum, then at what price should the preferred stock sell?

A. $62.79

B. $48.00

C. $52.92

D. $61.54

E. $63.38

Solutions

Expert Solution

1). Number of componding periods = 2*5 years = 10years

Semiannual discount rate = 4.5%/2 =2.25%

PV = FV/(1+r)^n

Where, PV and FV are present and future values

r is discount rate

n is number of periods

PV = $4500/(1+0.0225)^10

= 4500/1.2492034

= 3602.30

2). The correct option is point B. The incremental cash flows will only occur if a company decides to accept and invest in a project.

Option A is incorrect since constant cash flows might already be occuring from existing operations of a company.

Option C is incorrect because 'mutually exclusive' is a term that defines relationship between the projects.

Option D is incorrect because sunk costs are the costs that have already been occured and are independent of any decision making regarding future investments.

Option E is incorrect because depreciation is not a cash flow.

3). Preferred stock price = D/r

Where, D is annual dividend

r is required return

Preferred stock price = $4/0.065

= $61.54


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