Chcan 14,/You have the opportunity to bu of return on this investment is 13.5 pe
ID: 2799267 • Letter: C
Question
Chcan 14,/You have the opportunity to bu of return on this investment is 13.5 percent. You should be esse or not buying the investment if it were offered at a price of y a perpetuity which pays $810 ennually Your required rate ntally indifferent to buying (Hint: Find the today's value of future cash flows.) a. $5,000.00 810 Re 13.S b. $6,000.00 c. $6,666.67 d. $7,500.00 010a 10 (I + I3S)12 15. Which of the following is NOT considered a financial intermediary? a. Smart Financial Credit Union b. Teacher Retirement System of Texas c. Vanguard Structured Large-Cap Equity Fund d. Goldman Sachs' Investment Banking Division 16)Cars "R" Us has a beta equal to1.5 and a requiredreturnofi4%based on the CAPM. If the market rate of return is 10%, what is the riskfree rate of return Oy buta = RI , ). a. 2.00% b, 3.50% c. 4.00% d. 5.20% IS 1t /01+ 1,800. Thirty years 17. In 1981 the average tuition for one year at a certain state school was $ later, in 2011, the average cost was $13,700. What was the growth rate in tuition over the 30-year period? (Hint: Set up the formula. Try the numbers to see which one works.) b, 9% d. 6% a. 12% $1000 30yrs (13,700) growth An income statement reports a firm's cumulative revenues and expenses from the inception of the firm through the income statement date. 18. Which of the following statements is TRUE? a. b. Net income represents income that may be reinvested in the firm or distributed to its owners.Explanation / Answer
Requirement 14:
It is indifferent to buy or not to buy an investment if it is offered at the price equal to the present value of annuity.
Present value of annuity (perpetuity)
= Annuity / Rate of return
= 810 / 13.5%
= $6000
Correct Option is b) $6000
Requirement 16:
Required return under CAPM = Risk Free Rate + (Market Rate – Risk Free Rate) * beta
This implies,
14 = Risk Free rate + (10-Risk free rate)*1.5
14 = Risk free rate + 15 – 1.5 Risk free rate
0.5 Risk Free rate = 1
Risk free rate = 2%
Correct Option is a) 2%
Requirement 17:
Ending Average Price = Initial Average Price (1+growth rate)period
$13700 = $1800 (1+growth rate)30
1+growth rate = (13700/1800)1/30
1+growth rate = 1.069996
Growth Rate = 0.06996 = 0.7 = 7%
Correct option is c) 7%