Time value of money / stock risk
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In exchange for a $20,000 payment today, a well known company will allow you to chose one of the alternatives showing in the
following table. Your opportunity cost is 11%
Alternative Single Amount
A $28,500 at end of 3 years
B $54,000 at end of 9 years
C $160,000 at end of 20 years
A. Find the value today of each alternative
B. Are all the alterntatives acceptable- that is worth $20,000 today?
C. Which alternative, if any, will you take?
Consider the following cases
Case Amount of annuity Interest rate Period(yrs)
A $12,000.00 7% 3
B $55,000.00 12% 15
C $700.00 20% 9
D $140,000.00 50% 7
E $22,500.00 10% 5
A. Calculate the present value of the annuity assuming that it is :
1. An ordinary annuity
2. An annuity date
B. Compare your findings in part a(1) and a(2). All else being identitcal, which type of annuity - ordinary or annuity due- is preferable explain why.
You are considering three stocks- A,B, and C- for possible inclusion in your investment portfolio. Stock A has a beta of .80,
Stock B has a beta of 1.40, and stock C has a beta of -.30.
A. Rank these stocks from the most risky to the least risky.
B. If the return on the market portfolio increased by 12%, what change would you expect in the return for each of the stocks?
C. If the return on the market portfolio decreased by 5%, what change would you expect in the return for each of the stocks?
D. If you felt that the stock market was getting ready to experience a significant decline, which stock would you probably add to your portfolio? Why?
E. If you anticipated a major stock market rally, which stock would you add to your portfolio? Why?
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Solution Summary
The solution explains some questions relating to time value of money and stock risk.
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