Ch 4 Finance Exam 2 True False
PV of a perpetuity = Cr
F
Since a perpetuity generates cash flows every period infinitely, initial cash outflow must be discounted to calculate the present value.
F
Since a perpetuity generates cash flows every period infinitely, its FV is the same as its PV.
F
Since a perpetuity generates cash flows every period infinitely, there is no way to solve for the cash flow using the present value and the interest rate.
F
The difference between an annuity and a perpetuity is that a perpetuity ends after some fixed number of payments.
F
Trial and error is the only way to compute the internal rate of return (IRR) when interest is calculated over five or more periods.
F
We assume that r < g for a growing perpetuity.
F
A growing perpetuity is a cash flow stream that occurs at regular intervals and grows at a constant rate forever.
T
A growing perpetuity, where the rate of growth is greater than the discount rate, will have an infinitely large present value (PV).
T
A perpetuity is a stream of equal cash flows that occurs at regular intervals and lasts forever
T
All else equal, the present value of a perpetuity is higher when the interest rate is lower.
T
All else equal, the present value of a perpetuity is higher when the periodic cash flow is higher.
T
If two perpetuities have the same present value and the same interest rate, they must have the same cash flows.
T
Most car loans, mortgages, and some bonds are annuities.
T
One example of a perpetuity is the British government bond called a consol.
T
The internal rate of return (IRR) is the interest rate that sets the net present value (NPV) of the cash flows equal to zero.
T
The present value (PV) of a stream of cash flows is just the sum of the present values of each individual cash flow.
T
To find the value of a growing perpetuity one cash flow at a time would take forever.
T
To find the value of a perpetuity by discounting one cash flow at a time would take forever.
T
Cash flows from an annuity occur every year in the future.
f
An annuity is a stream of N equal cash flows paid at regular intervals.
t
Since a perpetuity generates cash flows every period infinitely, the cash flow generated equals the PV times the interest rate
t