Question

- You win the Powerball jackpot. The payoff is $300 million, payable in equal annual

amounts for 20 years. The first payment is today. The present value of the jackpot at 5%

is how much?

-

Which item indicates a flaw in the efficient market hypothesis?

(a) A bubble in asset prices

(b) Inflation fears increase interest rates

(c) Insiders can’t earn excess returns

(d) Market indexes drop when GDP falls

You take out a 4 month discount loan at 12%. Your effective rate is how much?

(a) 12.72%

(b) 12.6%

(c) 13.03%

(d) 12.96%

- Under what criterion can a firm be generous in extending credit over 30 days?

(a) high gross profit margin

(b) low product price

(c) low probability of payment

(d) low interest rate

A firm buys a fixed asset for $20 million with an 8 year useful life. The firm uses

straight-line depreciation. 2 years after purchase, the firm sells the asset for $16 million.

The firm has a 20% tax rate. How much money does the firm realize from the sale, net of

any tax effects?

(a) $16 million

(b) $15.8 million

(c) $10.8 million

(d) $17 million

Answer 1

Answer to Question 1:

Total Payoff = $300,000,000
Number of Payments = 20

Annual Payment = Total Payoff / Number of Payments
Annual Payment = $300,000,000 / 20
Annual Payment = $15,000,000

Interest Rate = 5%

Payments are made at the beginning of each year

Present Value = $15,000,000 + $15,000,000/1.05 + … + $15,000,000/1.05^18 + $15,000,000/1.05^19
Present Value = $15,000,000 * 1.05 * (1 - (1/1.05)^20) / 0.05
Present Value = $15,000,000 * 13.085321
Present Value = $196,279,815