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    Investments: PV, discount rate, compounding, FV, NPV, growth rate, preferred stock

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    1. You invest in an investment that pays 22 equal annual payments of $70 at the beginning of each of then next 22 years. What is the present value of this investment given a discount rate of 2% under annual compounding? Choose and place on the answer sheet the best answer from those provided below and attach your supporting work.

    2. What is the most that a rational investor would be willing to pay for an investment that pays $555 five years from today? This investor uses a discount rate of 5% and quarterly compounding for investments of this risk. Choose and place on the answer sheet the best answer from those provided below and attach your supporting work.

    3. If you pay $35 at the end of every month into an ordinary savings account that pays 4% interest, how much money will you have after 40 years? Choose and place on the answer sheet the best answer from those provided below and attach your supporting work.

    4. What is the future value of $1, one year from today, using an interest rate of 3% and quarterly compounding? Choose and place on the answer sheet the best answer from those provided below and attach your supporting work.

    5. What is the value of a share of common stock that just paid a dividend of $3 and has a growth rate of 7%. Your RRR is 10%. Choose and place on the answer sheet the best answer from those provided below and attach your supporting work.

    6. What is the value of a share of preferred stock with a face value of $45 that pays a dividend rate of 5%. Your RRR for this investment is 9% Choose and place on the answer sheet the best answer from those provided below and attach your supporting work.

    Provided Answers:
    Not all of the provided answers will be used and some may be used more then once.

    a. $2,685.06 b. $817.57 c. $107 d. $1,260.78
    e. $689.33 f. $833.92 g. 4.6 years h. $3,534.17
    i. $41,368.65 j. LBO k. $338 l. TVM
    m. $1,332.25 n. 4.66% o. $1.87 p. $432.90
    q. $25 r. 6.9 years s. $1.03 t. None of the above

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    Solution Preview

    1. You invest in an investment that pays 22 equal annual payments of $70 at the beginning of each of then next 22 years. What is the present value of this investment given a discount rate of 2% under annual compounding? Choose and place on the answer sheet the best answer from those provided below and attach your supporting work.
    Payment = 70
    Number of payments = 21
    Rate = 2%
    FV = 0
    By a financial calculator, compute PV = 1190.78
    Then in total the present value is 1190.78 + 70 = 1260.78

    2. What is the most that a rational investor would be ...

    Solution Summary

    In a clear and concise explantion, the calculations derive the answers.

    $2.19

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