QUIZ CH 4

Which of the following is true about perpetuities?

1) If two perpetuities have the same present value and the same interest rate, they must have the same cash flows 2) All else equal, the present value of a perpetuity is higher when the interest rate is lower 3) All else equal, the present value of a perpetuity is higher when the periodic cash flow is higher

Formulas for Present Value

1) PV of an Annuity= C x 1/r (1 - 1/ (1+r)^N) 2) PV of a growing annuity= C x 1/r-g (1-(1+r/1+g)^N) 3) PV of a growing perpetuity= C/r-g

Cash flows form an annuity occur every year in the future

False

Investment X and Investment Y are both growing perpetuities with initial cash flow of $100. Both investments have the same interest rate (r) and cash flows. The preset value of Investment X is $5,000, while the present value of investment Y is $4,000. Which of the following is true?

Investment X has a higher growth rate than Investment Y

Which of the following statements regarding perpetuities is FALSE?

PV of a perpetuity= r/C

Which of the following statements regarding annuities is FALSE?

The different between an annuity and a perpetuity ends after some fixed number of payments

You are given two choices of investments, Investment A and Investment B. Both investments have the same future cash flows. Investment A has a discount rate of 4% and Investment B has a discount rate of 5%. Which of the following is true?

The present value of cash flows in Investment A is higher than the present value of cash flows in Investment B

Which of the following statements regarding growing perpetuities is FALSE?

We assume that r < g for a growing perpetuity