Question

Which of the following is NOT correct? Multiple Choice If market value of equity of a corporation is the only information you know, you cannot determine its book value of equity. When it comes to compound interest, interest earned in each period is actually increasing over time/ Simple interest means that interest earned in this peirod is the same as the interest earned in next period. O Pension payment and mortgage payment are examples of perpetuity,

Answer 1

1)

Perpetuity payments as the name implies provides cash flows for an infinite amount of time or a never ending stream of cash flows. Both pension payment and mortgage payment have a start and end period for payment and hence cannot be considered as perpetuity.

Answer is Pension and Mortgage payment

2)

Annuity Payment every year (PMT) = $ 1400

Rate = 10% pa

Case 1

Number of years(nper) = 15

Present value of payment (PV) =
=pv(10%,15,1400! PV(rate, nper, pmt, [fv], [type])
= $ 10,648.51

Case II

Number of years = infinite

Present value of payment = PMT/ Rate = 1400/10% = $ 14,000

So Excess amount = (14000 - 10,648.51) = $ 3351.49

3)

Payment every quarter (PMT) =$ 2,450

Interest every quarter(rate) = 1.3%

Number of years = 20 = 20* 4 = 80 quarters

Size of mortgage(PV) =
=pv(1.3%, 80, 2450 PV(rate, nper, pmt, [fv], [type])
= $ 121,401