Reading 5: The Time Value of Money-LOS e, (Part 3)习题精选 forever, interpret, investment, div, class

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Session 2: Quantitative Methods: Basic Concepts
Reading 5: The Time Value of Money

LOS e, (Part 3): Calculate and interpret a perpetuity (PV only).

 

 

 

An investment offers $100 per year forever. If Peter Wallace’s required rate of return on this investment is 10%, how much is this investment worth to him?

A) $10,000.

B) $500.

C) $1,000.

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For a perpetuity, PV = PMT ÷ I = 100 ÷ 0.10 = 1,000.

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Compute the present value of a perpetuity with $100 payments beginning four years from now. Assume the appropriate annual interest rate is 10%.

A) $683.

B) $1000.

C) $751.

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Compute the present value of the perpetuity at (t = 3). Recall, the present value of a perpetuity or annuity is valued one period before the first payment. So, the present value at t = 3 is 100 / 0.10 = 1,000. Now it is necessary to discount this lump sum to t = 0. Therefore, present value at t = 0 is 1,000 / (1.10)³ = 751.

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Nortel Industries has a preferred stock outstanding that pays (fixed) annual dividends of $3.75 a share. If an investor wants to earn a rate of return of 8.5%, how much should he be willing to pay for a share of Nortel preferred stock?

A) $31.88.

B) $42.10.

C) $44.12.

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PV = 3.75 ÷ 0.085 = $44.12.

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Given investors require an annual return of 12.5%, a perpetual bond (i.e., a bond with no maturity/due date) that pays $87.50 a year in interest should be valued at:

A) $70.

B) $1,093.

C) $700.

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87.50 ÷ 0.125 = $700.