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FIN 3715 : Exam 2 2

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azuremammoth471
15 Mar 2019
School
LSU
Department
Finance
Course
FIN 3715
Professor
All

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Document Summary

Have to memorize the formula for pricing of a perpetuity: present value of a perpetuity equals the cash flow divided by the interest rate expressed by a decimal, slide 4. An annuity is a: level stream of cash flows occurring for a fixed period of time. What is the interest rate charged per period multiplied by the number of periods per year called: annual percentage rate, monthly rate multiplied by the number of periods. How does a perpetuity differ from an annuity: perpetuity payments never cease. Your parents are giving you a month for five years while you attend college to earn both a bachelor"s and a master"s degree. At a 7 percent discount rate, what are these payments worth to you when you first enter college: ,251. 00, n= 5x12=60, i/yr= 7/12= 0. 58333, pv= -25,251, pmt= 500. As your prize you will receive ,500 a month for twenty years.

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Related Questions

4.3

Need help with 4.4 a and b at bottom. 4.3 is required to answerthis.

Calculate the following values, assuming a discount rate of8%:

a.

present value of a perpetuity (also called a perpetual annuity)of $50 received each year at the end of each year

b.

present value of an annuity of $50 received at the end of eachyear for 5 years

c.

present value of an annuity of $50 received at the end of eachyear for 10 years, with the first payment to be received at the endof the 6th year

d.

present value of a perpetuity of $50, with the first paymentreceived at the end of the 16th year.

ANSWER:

a. PV of perpetuity = A/i where A is annual payment &i is disc rate
SO PV of Perpetuity = 50/8% = $625.00

b. Here it is PV of annuity for n=5 & PMT=$50
SO PVA = PMT*(PVIFAi,n)
i.e. PVA = $50*(PVIFA8%,5).
From PV of annuity Table, we get (PVIFA8%,5) = 4.3295
So PVA = 50*4.3295 = $216.48

c. This has 2 parts. First Find the PV of Annuity at 6 yrs &then find the PV of that amount at T0.
Here it is PV of annuity for n=10 & PMT=$50
SO PVA = PMT*(PVIFAi,n)
i.e. PVA = $50*(PVIFA8%,10).
From PV of annuity Table, we get (PVIFA8%,5) = 6.7101
So PVA = 50*6.7101 = $335.51
Now PV = FV/(1+i)^n = $335.51/(1+8%)^6 = $211.43

d. This has 2 parts. First Find the PV of Perpetuity at 16 yrs& then find the PV of that amount at T0.
PV of Perpetuity = A/i = 50/8% = $625
Now PV of this amount PV = 625/(1+8%)^16 = $182.43

4.4

a.

Show (with a time line, for example) that the perpetuity in4.3a. is exactly the same as the sum of the annuities andperpetuities in 4.3b. to 4.3d.

b.

Show that their present values add up to the same amount.

Question 1 5 pts

0 multiple_choice_question 22046808

The internal rate of return (IRR) is the interest rate that sets the net present value of the future cash flows equal to ________.

The internal rate of return (IRR) is the interest rate that sets the net present value of the future cash flows equal to ________.

zero
one
one hundred
none of the above

Question 2 5 pts

On a timeline, the space between date 0 and date 1 represents the _______ between dates. Let’s assume it is the first year of the loan. Date 0 is the beginning of the first year, and date 1 is the end of the first year.

On a timeline, the space between date 0 and date 1 represents the _______ between dates. Let’s assume it is the first year of the loan. Date 0 is the beginning of the first year, and date 1 is the end of the first year.

dollar amount
present value
time period
future value

Question 3 5 pts

As the interest rate __________, present value decreases.

As the interest rate __________, present value decreases.

decreases
increases
remains unchanged
is unrelated

Question 4 5 pts

The present value (PV) of a stream of cash flows is the _______ the present values of each individual cash flow

The present value (PV) of a stream of cash flows is the _______ the present values of each individual cash flow

difference between
product of
sum of
same as

Question 5 5 pts

When a constant cash flow will occur at regular intervals for a finite number of periods of time, it is called a(n) __________.

When a constant cash flow will occur at regular intervals for a finite number of periods of time, it is called a(n) __________.

annuity
perpetuity
interest payment
principle payment

Question 6 5 pts

Edit this Question Delete this Question

0 multiple_choice_question 22047052

There are two basic types of annuities:

There are two basic types of annuities:

Discounted and compounded annuities
Ordinary annuities and annuities due.
Future value and present value annuities
None of the above

Question 7 5 pts

The NPV measures the ______ change in shareholder wealth that arises from undertaking a project.

The NPV measures the ______ change in shareholder wealth that arises from undertaking a project.

consistent
dollar
annual
semi-annual

Question 8 5 pts

The Net Present Value rule implies that we should compare a project’s net present value (NPV) to ________

The Net Present Value rule implies that we should compare a project’s net present value (NPV) to ________

zero
one
100
none of the above

Question 9 5 pts

To endow a perpetuity is the same as calculating the present value (PV) of a perpetuity. Say you want to endow an annual graduation party at your alma mater. You want the event to be a memorable one, so you budget $30,000 per year forever for the party. If the university earns 8% per year on its investments, and if the first party is in one year’s time, how much will you need to donate to endow the party?

The formula for PV of a perpetuity = C\r; = $30,000 \ 0.08; =

To endow a perpetuity is the same as calculating the present value (PV) of a perpetuity. Say you want to endow an annual graduation party at your alma mater. You want the event to be a memorable one, so you budget $30,000 per year forever for the party. If the university earns 8% per year on its investments, and if the first party is in one year’s time, how much will you need to donate to endow the party?

The formula for PV of a perpetuity = C\r; = $30,000 \ 0.08; =

$3,750
$37,500
$375,000
$3,750,000

Question 10 5 pts

With an Ordinary Annuity, payments are required at the ________ of each period. An example of this is bonds which usually pay coupon payments at the end of every six months until the bond's maturity date.

With an Ordinary Annuity, payments are required at the ________ of each period. An example of this is bonds which usually pay coupon payments at the end of every six months until the bond's maturity date.

beginning
middle
end
payments are not required

1. How many years will it take $400 to grow to $1671 if it is invested at 10 percent compounded annually?

2. At what rate would $1000 have to be invested to grow to $4046 in 10 years ?

3. What is the present value of an ordinary annuity of $1000 per year for 7 years discounted back to the present at 10 percent? What would be the present value if it were an annuity due?

4. You have just borrowed $100,000 and you agree to pay it back over the next 25 years in 25 equal end of the year payments plus 10 percent compound interest on the unpaid balance ? What will be the size of these payments?

5. What is the present value of a $1000 perpetuity discounted back to the present at 8 percent?

6. What is the present value of a $1000 annuity for 10 years, with the first payment occuring at the end of year 10( that is, ten $1000 payments occuring at the end of year 10 through year 19)given a discount rate of 10 percent?

7. Given a 10 percent discount rate, what is the present value of a perpetuity of $1000 per year if the first payment does not begin until the end of year 10?