You are considering purchasing common stock in AMZ Corporation. You anticipate that the company will pay dividends of $5.00 per share next year and $7.50 per share in the following year. You also believe that you can sell the common stock two years from now for $30.00 per share. If you require a 14% rate of return on this investment, what is the maximum price that you would be willing to pay for a share of AMZ common stock?
Answer:
PV = $5.00 /(1.14)1 + ($7.50 + $30.00)/(1.14)2
= $33.24
To evaluate and compare investment proposals, we must adjust all cash flows to a common date.
Answer: TRUE
Consider an investment that has cash flows of $500 the first year and $400 for the next four years. If your opportunity cost is 10%, you should be willing to pay $1,607.22 for this investment.
Answer: TRUE
You believe WSU stock will pay dividends of $1.00, $1.25, and $1.50 at the end of each of the next 3 years. Immediately after receiving the third dividend, you will sell the stock for $28.50. If the appropriate discount rate is 12%, you should be willing to pay $20.75 for this stock.
Answer: FALSE
The present value of a complex cash flow stream is equal to the sum of the present values of each of the cash flows.
Answer: TRUE
You have decided to invest $500 in a mutual fund today and make $500 end-of-the-year investments in the fund each year until you retire for 40 years. Assuming an opportunity cost of 12%, what do you estimate that you will have in this account at retirement?
Answer:
Calculator steps:
-500 PV
-500 PMT
40 N
12 I/yr or I
FV = $430,071
You are planning to deposit $10,000 today into a bank account. Five years from today you expect to withdraw $7,500. If the account pays 5% interest per year, how much will remain in the account eight years from today? Round to the nearest dollar.
Answer:
FV = $10,000(1.05)5
= $12,760
Amount to invest in remaining three years = $12,760 - $7,500 = $5,260
FV = $5,260 (1.05)3
= $6,089
Suppose you are 40 years old and plan to retire in exactly 20 years. 21 years from now you will need to withdraw $5,000 per year from a retirement fund to supplement your social security payments. You expect to live to the age of 85. How much money should you place in the retirement fund each year for the next 20 years to reach your retirement goal if you can earn 12% interest per year from the fund?
Answer: Using a financial calculator N=25, i=12, PMT=5000, PV=39,215.70=s the amount in fund at age 60.
To find the annual contribution, n=20, i=12,PV=0, FV=39215.70, solve for PMT=-544.27, so
Annual contribution = $544.27
