Ch 4 Finance Exam 2 True False

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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


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