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# Calculating Present Value of Lease Payments/Preferred Stock

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1. You bought a painting 10 years ago for \$100,000. If you sold it for \$310,600, what was your annual return on investment?
a) 8%
b) 10%
c) 12%
d) 14%

2. In an amortization schedule for a six-year loan with equal annual principal repayments
a) less than half of the loan would be repaid at the end of year three
b) the annual payment stays the same
c) amount of principal repaid decreases each year
d) the annual payments are higher in the earlier years

3. If Air Atlantic enters a 12-year lease with annual (end of year) payments of \$500,000, what is the present value of the lease payments if the interest rate is 14%.
a) \$ 2,830,000
b) \$13,635,500
c) \$ 6,000,000
d) \$ 3,226,200

4. A preferred stock with a \$100 par value pays an annual dividend at a rate of 2.6%. What is a share of this stock worth today if preferred stock with the same risk profile yields 11.75%?
a) \$8.51
b) \$20.00
c) \$22.13
d) \$28.80
e) \$100.00.

#### Solution Preview

1. You bought a painting 10 years ago for \$100,000. If you sold it for \$310,600, what was your annual return on investment?

Selling price=S=\$310,000
Purchase price=P=\$100,000
Number of years=n=10
Annual rate of return=(S/P)^(1/n)-1=(310000/100000)^(1/10)-1=11.98%
Correct option is c) 12%

2. In an amortization schedule for a six-year loan with equal annual principal repayments
a) less than half of ...

#### Solution Summary

This solution depicts the steps needed to estimate the annual rate of return, value of lease payments and worth of a preferred stock.

\$2.19