1. Present Value of a Growing Annuity: You decide to start saving $2,000 per ann

Question

1. Present Value of a Growing Annuity: You decide to start saving $2,000 per annum with the expectation of increasing that amount by 4% per year for the next 20 years (inflation, real pay raises, etc.). Required return is 7%. What is the present value of your contributions?

Question options: a.$27,555     b.$30,075        c.$28,555         d.$29,555

2. Future Value of a Growing Annuity: Using the last problem you start saving $2,000 per annum and increasing savings by 4% per annum. Now assume you can earn an 8% return on your investments, with required return still being 7%, how much will you have in 20 years?

Question options: a.$157,431 b.$164,585      c.$159,585       d.$170,585

3. Which of the following is not a required input of the Capital Asset Pricing Model (CAPM)?

Question options: a. Current risk-free rate (Rfr)              b.Historical risk-free rate (Rfr)

     c.Market risk premium (Rm)              d.Beta (B) of the asset being analyzed

4. Value & Price: Which of the following is NOT true?

Question options:

a.When a security is priced below the value of its cash flows an investor should buy.

b.When a security is priced above the value of its cash flows an investor should sell.

c.Bonds and stocks are each a form of security in the cash flows of a corporation or issuer.

d.All stocks have the same cost of equity.

5. Compounding a Cash Flow (Future Value of Single Payment): Your favorite auntie just died (actually, you hated her) and left you a lump sum of $20,000 (now you love her!). On the one hand, you are thinking about buying a new car. On the other hand, your mom and dad are saying "don't be stupid, save it for a rainy day" and suggest putting it away for a down payment in five years for a home. Assuming you can earn an 8% return how much will you have in 5 years?

Question options: a.$26,456     b.$26,856        c.$27,914         d.$29,387

Explanation / Answer

(1) Annual Contributions = $ 2000, Tenure = 20 years, Required Return = 7 % and Growth Rate = 4 %

Present Value of Growing Annuity = 2000 x [1/(0.07 - 0.04)] x [1-{(1.04) / (1.07)}^(20)] = $ 28918.143

The answer is approximately equal to option (c) $ 28555 and hence the same is considered to be the correct answer.

NOTE: Please raise separate queries for solutions to the remaining unrelated questions.

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