Question

1. What does P/E Ratio of a 10 indicate?
   a. ​It would take 10 years for an investor to recover his or her initial investment
   b. ​The firm will pay a dividend of $10 per share.
   c. ​The value of the stock will be 10 times the initial investment at the time of maturity.
   d. ​An investor would receive 10 percent of the total earnings of the firm, at the time of liquidation
2. Suppose a U.S. treasury bond will pay $2,500 five years from now. If the prevailing interest rate on 5-year treasury bonds is 4.25%, compounded semiannually, the value of the bond is closest to:
3. The present value of $10,000 to be received in 10 years, discounted at an annual rate 6.78% is closest to?
4. Which one of the following is a source of cash? a) Increase in accounts receivable, b) Decrease in accrued liabilities, c) Decrease in bank loan, d) Increase in retained earnings

Answer 1

1. option c. ​

The value of the stock will be 10 times the initial investment at the time of maturity.

2. Given

future value = $2500

time N = 5

r = 4.25% compounded semi-annually

Present value = FV/ (1 + r/2)^N*2

PV = 2500 / ( 1 + 0.0425/2)^10

PV = $2025.91

Value of investment is $2025.91

3. PV = 10000/ (1+r)ⁿ

PV = 10000/(1.0678)^10

PV = 10000 / 1.927077

PV= $5189.21

Present value of 10,000 is $5189.21

4. Option D .    Increase in retained earnings