FIN 305 TEST BANK FINAL EXAM 1 \ACTUAL PRACTICE
EXAM QUESTIONS AND CORRECT DETAILED
ANSWERS (100% CORRECT VERIFIED SOLUTIONS)
A NEW UPDATED VERSION |ALREADY GRADED A+
BEST DOCUMENT FOR EXAM PREP
A generic formula for finding the PV of multiple cash flows:
a level stream of payments that lasts a fixed number of periods
annuity
examples of annuities
Ex: Bonds, leases, mortgages, pensions, etc.
,formula for finding present value of annuities:
The first cash flow of the annuity comes in ________. I.e., not today, not
in two periods, etc. We must modify the formula a bit those cases
one period
The periodic cash flow, C, must be ______ for the pv annuity formula to
work (i.e., it can not change from period to period).
constant
there must be a _______ endpoint for the cash flows (i.e. not
perpetual...we'll learn another formula for perpetuities).
fixed
FV annuity formula
,Caveats and assumptions for the FV annuity formula
Present Value of a Perpetuity (constant cash flow each period,
forever):
Present Value of a Growing Perpetuity (cash flow grows at a
constant rate, forever):
, What is the PV of a risk-free series of $5,000 payments that arrive at
the end of each year starting in 1 year and continuing forever
(assume the risk free rate is 1%)?
What is the PV of a series of $5,000 annual payments with the first
cash flow starting 3 years from today and continuing forever
(assume the appropriate discount rate is 10%)?
An annual constant-growth perpetuity just paid $10, and you know it
will pay
$10.50 in one year. Assume the appropriate discount rate is 10%.
How much should you pay for the rights to the perpetuity?
EXAM QUESTIONS AND CORRECT DETAILED
ANSWERS (100% CORRECT VERIFIED SOLUTIONS)
A NEW UPDATED VERSION |ALREADY GRADED A+
BEST DOCUMENT FOR EXAM PREP
A generic formula for finding the PV of multiple cash flows:
a level stream of payments that lasts a fixed number of periods
annuity
examples of annuities
Ex: Bonds, leases, mortgages, pensions, etc.
,formula for finding present value of annuities:
The first cash flow of the annuity comes in ________. I.e., not today, not
in two periods, etc. We must modify the formula a bit those cases
one period
The periodic cash flow, C, must be ______ for the pv annuity formula to
work (i.e., it can not change from period to period).
constant
there must be a _______ endpoint for the cash flows (i.e. not
perpetual...we'll learn another formula for perpetuities).
fixed
FV annuity formula
,Caveats and assumptions for the FV annuity formula
Present Value of a Perpetuity (constant cash flow each period,
forever):
Present Value of a Growing Perpetuity (cash flow grows at a
constant rate, forever):
, What is the PV of a risk-free series of $5,000 payments that arrive at
the end of each year starting in 1 year and continuing forever
(assume the risk free rate is 1%)?
What is the PV of a series of $5,000 annual payments with the first
cash flow starting 3 years from today and continuing forever
(assume the appropriate discount rate is 10%)?
An annual constant-growth perpetuity just paid $10, and you know it
will pay
$10.50 in one year. Assume the appropriate discount rate is 10%.
How much should you pay for the rights to the perpetuity?
