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Which of the following statements is MOST true? A. The higher the required rate of return...

Which of the following statements is MOST true?

  • A. The higher the required rate of return on future cash flows, the higher the price that someone is willing to pay for those cash flows.

  • B. The formula for present value of an annuity due can only be used when the first cash flow is occurring at time 0.

  • C. The general formula for future value of an ordinary annuity is equal to the general formula for present value of an ordinary annuity multiplied by the future value interest factor (FVIF).

  • D. There is an inverse relationship between risk and rate of return.

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Homework Answers

Answer #1

Option B is correct

The formula for present value of an annuity due can only be used when the first cash flow is occurring at time 0.

The formula below can be used to find the present value of an annuity due, in which the first cash flow occur immediately, that is at time 0.

Option A is incorrect because the higher the required rate of return on future cash flows, the lower the price that someone is willing to pay for those cash flows.

Option C is incorrect because the relationship between the present value of an annuity and the future value of an annuity is not easy to establish as given in the answer option

Option D is incorrect because there is a direct relationship between risk and rate of return. Higher the risk, higher is the expected return

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