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tester [92]
3 years ago
8

Recall British Consols first issued in 1700s are considered perpetuities. If a British Consol will pay 100 GBP annually starting

one year from now and interest rate is 5%.
Required:
a. What is this asset worth today?
b. If interest rate is always 5%, what is the asset worth 3 year from now?
c. Does the asset appreciate or depreciate in value?
d. Do you have any return if you are holding an asset that does not change in value? What is your rate of return?
Business
1 answer:
Sav [38]3 years ago
6 0

Answer:

a. Present value of perpetuity today = Perpetuity amount / Interest rate  = 100 / 0.05 = 2,000GBP. Thus, this asset worth 2,000GBP today

b. Value of perpetuity 3 years from now = Perpetuity amount / Rate = 100/.05 = 2000GBP. The asset worth 3 year from now is 2,000GBP.

c. Since this is a perpetuity; it neither appreciate nor depreciate in value provided the interest rate is constant.

d. There will be a return since we are getting cash-flows in a yearly basis; rate of return will be the interest rate = 5%

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Your firm is considering opening a branch office in Kyle. The office would cost $485,000 to build the office. During the office
wariber [46]

Answer:

The NPV from opening the branch office is negative ( -$106668.08). Thus the branch office should not be opened.

Explanation:

The decision to open the branch office will be taken based on the NPV provided by opening of the branch office. If the NPV of a project is positive based on the required rate of return used as a discount rate fro cash flows, the investment is worth undertaking.

The net present value (NPV) for a project can be calculated as,

NPV = CF1 / (1+r)  + CF2 / (1+r)²  + ...  + CFn / (1+r)^n  -  Initial Outlay

Where,

  • r is the appropriate discount rate
  • Initial Outlay is the Initial cost of the project
  • CF represents cash flows from the project

As the required return is 16%, we will take this as the appropriate discount rate.

NPV = 45000 / (1+0.16)  +  120000 / (1+0.16)²  +  150000 / (1+0.16)³  +

150000 / (1+0.16)^4  +  150000 / (1+0.16)^5  -  485000

NPV = - $106668.08

As the NPV from project is negative at a required return of 16%, the project should not be under taken and the branch office should not be open.

7 0
2 years ago
As rationing mechanisms, prices options: a. are efficient, but long lines are inefficient. b. and long lines are inefficient. c.
valentina_108 [34]

Answer:

a. are efficient, but long lines are inefficient

Explanation:

A rationing mechanism is a system in which who gets how many goods during a shortage is carefully chosen, in order to do these long lines are used even though they are inefficient.

I hope you find this information useful and interesting! Good luck!

4 0
2 years ago
A self-employed person deposits $2,000 annually in a retirement account (called a Keogh or H.R. 10 plan) that earns 8 percent. U
lana [24]

Answer:

$146,212.00  

Explanation:

PMT which is the annual savings is $2000

Rate  is 8%

The annual savings would last for 25 years(65-40)

FVIFA FACTOR=(1+r)^n-1/r

r=8%

n=25

FVIFA FACTOR=(1+8%)^25-1/8%

FVIFA FACTOR=(1.08)^25-1/0.08

FVIFA FACTOR=(6.848475196-1)/0.08=73.106

Amount in the account at retirement=PMT*FVIFA FACTOR

Amount in the account at retirement=$2000*73.106=$146,212.00  

6 0
2 years ago
Which of the following actions would be most likely to reduce potential conflicts between stockholders and bondholders?
bagirrra123 [75]

Answer:

C. Including restrictive covenants in the company's bond indenture (which is the contract between the company and its bondholders).  

Explanation:

One of the major actions that would most likely reduce potential conflicts between stockholders and bondholder is the Inclusion of restrictive covenants in the company's bond indenture (which is the contract between the company and its bondholders).  

Restrictive covenants are Bond covenants that are designed to protect the interests of both parties by forbiding the issuer from undertaking certain activities that are detrimental to the holders of the bond.

Restrictive covenants manages the agency problem between stockholders and bondholder.

5 0
3 years ago
Assume that Germany and China can produce beer and cloth. If the MPLc/MPLb for Germany is 2/5 and the MPLc/MPLb for China is 1,
elena55 [62]

Answer: c. specialize in producing beer and export beer.

Explanation:

As per the Theory of Competitive Advantage posited by David Ricardo, a country should specialize in the good that it has a competitive advantage in. A country has a competitive advantage if it incurs a less opportunity cost in producing the good.

Opportunity cost of producing beer for Germany = MPLc/MPLb = 2/5

Opportunity cost of producing beer for China = MPLc/MPLb = 1

Germany has a lower cost of producing beer so they should specialize in this and export it.

6 0
2 years ago
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