8. Congratulations! You are the proud winner of the multi-state Sour Ball Lotter

Question

8. Congratulations! You are the proud winner of the multi-state Sour Ball Lottery. You are to receive $2,000,000 at the end of each year for the next 20 years. While the Lottery Commission refers to this as a $40,000,000 jackpot, if you choose the "cash option" they will give you much less than that; you can receive a lump sum payment today equal to the present value of the ordinary annuity instead of the 20 annual payments. If the discount rate that the Lottery Commission uses to determine the lump sum payoff is 4.8%, what is your payoff if you select the cash option? Round to the nearest dollar. a. $29,707,503 b. $ 27,180,653 c. $25,352,567 d. $22,188,028 9. When constructing a portfolio of securities, proper diversification will allow us to gt rid of most risk a. Non-diversifiable c. Market d. Down-side 10. If Samuel deposits S 15,120 into a bank account that pays 6.4% interest compounded quarterly, what vwill the account balance be in 15 years? Round to the nearest dollar. a. $31,310 b. $36,825 c. $39,190 d. $42,775 11. A(n) fully reflect all available information at any instant in time. market is one where the prices of the assets traded in that market a. Agency b. Commodity c. Over-the-counter d. Efficient 12. The goal of the firm should be a maximization of profits (net income per share). b. maximization of shareholder wealth. c. maximization of sales d. minimization of costs.

Explanation / Answer

8. 25,352,567

Pv of annuity = 2,000,000 ((1- (1+0.048)^-20)/0.048)

9. Unsystematic

Unsystematic risk refers to those uncertainties related to a particular industry/company. Through diversification unsystematic risk can be reduced as the adverse fluctuation in one industry get compensated with the glories of another industry.

10. 39190

P = 15120

r = 6.4%

Compounded quarterly

No of years 15

Amount = 15120(1 +(6.4/400))^15×4

= 15120(1.016)^60

= 39190

11. Efficient

An efficient market is one in which information is freely available.

12. Maximization of shareholders wealth

Shareholders are the owners of the fi therefore ultimate goal of a fi.is to maximize their wealth which happens when the market price of the shares increases.

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