Reading 5: The Time Value of Money- LOS d, (Part 3)～ Q1-4 him, investment, forever, required, return

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Q1. 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)   $1,000.

B)   $10,000.

C)   $500.

Q2. 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)   $751.

C)   $1000.

Q3. 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)    $44.12.

C)    $42.10.

Q4. 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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