FIN 320 CH 4 Quiz
Investment X and Investment Y are both growing perpetuities with initial cash flow of $100. Both investments have the same interest rate (r). The present value of Investment X is $5,000, while the present value of Investment Y is $4,000. Which of the following is true? A. Investment X has a lower growth rate than Investment Y. B. Investment X has a higher growth rate than Investment Y. C. The answer cannot be determined without knowing the interest rate for both investments. D. This makes no sense - with the same initial cash flow and the same interest rate, Investment X and Investment Y should have the same present value.
B
Which of the following statements regarding growing perpetuities is FALSE? A. PV of a growing perpetuity = c/(r-g) B. To find the value of a growing perpetuity one cash flow at a time would take forever. C. We assume that r < g for a growing perpetuity. D. A growing perpetuity is a cash flow stream that occurs at regular intervals and grows at a constant rate forever.
C
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? A. The present value of cash flows in Investment A is lower than the present value of cash flows in Investment B. B. The present value of cash flows in Investment A is equal to the present value of cash flows in Investment B. C. The present value of cash flows in Investment A is higher than the present value of cash flows in Investment B. D. No comparison can be made - we need to know the cash flows to calculate the present value
C
Which of the following is true about perpetuities? A. All else equal, the value of a perpetuity is higher when the interest rate is lower. B. All else equal, the value of a perpetuity is higher when the periodic cash flow is higher. C. If two perpetuities have the same present value and the same interest rate, they must have the same cash flows. D. All of the above are true statements.
D
Which of the following statements regarding annuities is FALSE? A. Most car loans, mortgages, and some bonds are annuities. B. An annuity is a stream of N equal cash flows paid at regular intervals. C. PV of an annuity = C * (1/r){1-[1/(1+r)^N]} D. The difference between an annuity and a perpetuity is that a perpetuity ends after some fixed number of payments.
D
Which of the following statements regarding perpetuities is FALSE? A. To find the value of a perpetuity one cash flow at a time would take forever B. One example of a perpetuity is the British government bond called a consol. C. A perpetuity is a stream of equal cash flows that occurs at regular intervals and lasts forever. D. PV of a perpetuity = r/c
D
True or False: Cash flows from an annuity occur every year in the future.
False