Question

18. You are comparing two investments, both of which provide annuity payments in exchange for a lump sum investment today. Each annuity is for a period of 25 years and each pays $500 a month. You require a 7 percent return on these investments. Annuity A pays at the beginning of each month and annuity B pays at the end of each month. Given this information, which one of the following statements is correct?
a. Both annuities are equally valuable today.
b. Annuity B is worth more today because of the timing of its cash flows.
c. Annuity A is worth more today because you will receive 25 payments whereas Annuity only pays 24 payments.
d. Annuity A has a higher present value and a lower future value than annuity B.
e. Annuity A has both a higher present value and a higher future value than annuity B.

19. The Cole Co. has a return on equity of 13.5 percent, a debt-equity ratio of .8, and a total asset turnover of 1.9. What is the return on assets?
a. 7.50 percent
b. 10.80 percent
c. 20.52 percent
d. 24.30 percent
e. 25.65 percent

Please give a process explanation of finding these values.....thank you!

Answer 1

Answer to Question 18) Timing has significant impact on the value of the money transacted (received/paid) in future. Based on the given data, pls find below workings on the Present Value and Future value of Annuity A and Annuity B; Based on the worings, the correct answer is  e. Annuity A has both a higher present value and a higher future value than annuity B.

Question 19) The detailed steps provided below along with the answer highlighted in yellow: Answer (a) 7.50%