cheat sheet 2.docx

# cheat sheet 2.docx - A perpetuity is simply a set of equal...

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A perpetuity is simply a set of equal payments that are paid forever. If the payment is C, then the present value of the perpetuity is PV 0 = C/r The value of a perpetuity can be used to approximate the value of similar long- lived annuities. Example: Assume a 10% interest rate and compare the following alternatives. A: a perpetuity of \$100 B: a 30-year annuity of \$100 PV A = 100/0.1 = \$1,000. PV B = \$942.69. The PV of the 30-year annuity approximates to the PV of a similar perpetuity. constant growth perpetuity  is the same as a regular perpetuity, but just that  the cash flow is growing (or declining) each year at a constant rate forever. If the payment is C and growth rate is g,   PV 0  = C/(r-g)  … PV = C + C/r 1. Which of the following questions are addressed by financial managers? II. Should customers be given 30 or 45 days to pay for their credit purchases? III. Should the firm borrow more money? IV. Should the firm acquire new equipment? 2. Which one of the following is a capital budgeting decision? B. deciding whether or not to purchase a new machine for the production line 3. Which one of the following is a capital structure decision? D. determining how much debt should be assumed to fund a project 4. Which one of the following is a working capital management decision? B. determining whether to pay cash for a purchase or use the credit offered by the supplier 5. Which one of the following best states the primary goal of financial management?

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