In: Finance
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
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