Question

You win the lottery and have a choice of receiving annual payments (beginning one year from today) of $50,000 for 25 years - or a lump sum of $875,000. If the discount rate is 2.8%, how much do you gain by making the correct financial choice? | ||||

$50,000.00 | ||||

$875,000.00 | ||||

2.8% | ||||

25 | ||||

PV of Pmts: | ||||

Gain: | ||||

A share of stock has most recently paid am annual dividend of $4.50. The next dividend will be paid one year from today. If you assume the dividend will grow in perpetuity at an annual rate of 2% as it has in the past, and the Required Rate of Return is 8.2%, what is the value of a share of this stock, | ||||

$4.50 | ||||

8.2% | ||||

2.0% | ||||

Answer: | ||||

What would be the value of the stock described in the above question if the annual dividend was not expected to grow. Assume the same Required Rate of Return. | ||||

Answer: | ||||

You decide to buy a new car, a new BMW 325, because you think you'll look hip driving it. The car cost $70,000, but you'll only need to finance $62,500. You can finance it at 4.1% APR for 6 years. What will your monthly payments be? | ||||

$70,000.00 | ||||

$62,500.00 | ||||

4.1% | ||||

6 | ||||

12 | ||||

Answer: |

Answer #1

**Answer 1:**

To compare both the options, we need to calculate the PV value of both.

**PV of Option 1:**

PV of Annuity = Amount * (1 - (1+R)^(-n))/R

Where, R is the discount rate (2.8%) and n is number of years (25 years). Putting the values in the formula:

= $50,000 * (1 - (1.028^(-25))/0.028

**= $890,382**

**PV of option 2:**

The other option is to get $875,000 in lumpsum today.

Clearly, we should **choose option 1 as it has greater
PV.**

**The gain we make by choosing option 1 is:**

**$890,382 - $875,000 = $15,382.**

Q13
Someone offers to buy your car for five, equal annual payments,
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Multiple Choice
$2,648.53
$2,839.24
$3,123.16
$2,783.86

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