FNAN 301, spring 2010, quiz 1, version MU1, solutions
1. You own an office building worth $520,000 that is expected to produce cash flows that grow
at a constant rate forever.
The next set of rent payments is due in one year and, after expenses,
you expect a cash flow of $35,000.
The discount rate for the office building is 12.0 percent.
By
how much are cash flows expected to grow each year?
Write your answer in the box and round
it to the nearest hundredth of a percent (for example, 1.23%, 1.20%, 1.00%, .0123, .0120, or .
1000).
Each year, cash flows are expected to grow by
2. You own a building that is expected to make fixed annual cash flows forever.
If the building
is worth $29,500,000, the cost of capital is 11.9%, and annual fixed cash flows are expected with
the first one due in one year, then what is the amount of the annual cash flow produced by the
building expected to be.
Write your answer in the box and round it to the nearest dollar.
The amount of the annual cash flow produced
by the building expected to be
3. Investment A is expected to pay $K to investors in YA years and has a discount rate of R%.
Investment B is expected to pay $K to investors in YB years and has a discount rate of R%.
All
investments that pay $K and have a discount rate of R% pay the same amount and have the same
discount rate.
There are no cash flows expected from the investments other than those noted in
the question.
If K > 0, R > 0, and YA > YB > 0, then which of the following assertions is true?
Circle your answer.
A. The value of investment A is greater than the value of investment B
B. The value of investment A is less than the value of investment B
C. The value of investment A is equal to the value of investment B
D. More than one of the assertions above is true
E. It is unclear whether the value of investment A is greater than, less than, or equal to the value
of investment B
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