Question

5. Your inheritance will pay you $100,000 a year for five years beginning now. You can invest it in a CD that will pay 7.75 percent annually. What is the present value of your inheritance? (Round to the nearest dollar.) A) $399,356 B) $401,916 C) $433,064 D) $467,812 6. Your father is 60 years old and wants to set up a cash flow stream that would be forever He would like to receive $20,000 every year, beginning at the end of this year. If he could invest in account earning 9 percent, how much would he have to invest today to receive his perpetual cash flow? (Round to the nearest dollar.) A) $222,222 B) $200,000 C) $189,000 D) $235,200 7. Ali will invest $2,800 in year one, $3,700 in year two, and $4,900 in year three. If he can earn 7percent on an investment that he makes, what is the future value of his investments at the end of three years? A) $14,241 B) $13,768 $11,320 C) D) $12,999 8. Moon Corporation's stock has an expected return of 13.2% and a beta of 1.60. If the risk free rate is 3%, What is the market risk premium? A) 6.38% B) 4.95% C) 7.08% D) 5.83%

Answer 1

5)	Present value of an annuity due = {C*[(1-(1/(1+r)^t))/r]}*(1+r)
	where C is the annuity payment that is 100000
	r is the interest rate that is .0775
	t is the year that is 5.
	Present value of an annuity due = {100000*[(1-(1/(1.0775)^5))/.0775]}*(1.0775)
	Present value of an annuity due = {100000*[(1-(.688515))/.0775]}*(1.0775)
	Present value of an annuity due = {100000*[4.019157]}*(1.0775)
	Present value of an annuity due = {401915.7}*(1.0775)
	Present value of an annuity due = 433064.2
	C) $433064
6)	Present value of a perpetuity = C/r
	where C is the annual payment in perpetuity that is 20000.
	r is the interest rate that is 9%.
	Present value = 20000/(.09)
	Present value = 222222.2
	He has to invest the following amount to receive the perpetual cash flow
	A) $222222.
7)	Future Value = Present Value*((1+r)^t)
	where r is the interest rate that is 7% and t is the time period in years.
	t	3	2	1
	Year	1	2	3
	cash flow	2800	3700	4900
	future value at the end of three years	3430.12	4236.13	5243
	sum of future values	12909.25
	D) 12909.
8)	Under the Capital Asset pricing model
	Rs = Rf + Beta*(Rm-Rf)
	Rs is the expected return on the security that is .132.
	where Rf is the risk free rate that is 3%.
	Beta is 1.60.
	Rm - Rf = difference between the expected return on the market
	portfolio and the risk free rate.
	.132 = .03+1.60*(Rm-Rf)
	Rm - Rf = .102/(1.60)
	Rm - Rf = .06375.
	A) 6.38%.