You are thinking about investing in a mine that will produce $10,000 worth of ore in
the first year.
As the ore closest to the surface is removed it will become more
difficult to extract the ore.
Therefore, the value of the ore that you mine will decline
at a rate of 8% per year forever.
If the appropriate interest rate is 6%, then the value
of this mining operation is closest to:
A) $71,429
B) $500,000
C) $166,667
D) This problem cannot be solved
PV = CF / (r – g) = 10,000 / (0.06 – (0.08)) = 71,429
Your son is about to start kindergarten in a private school.
Currently, the tuition is
$12,000 per year, payable at the start of the school year.
You expect annual tuition
increases to average 6% per year over the next 13 years.
Assuming that you son
remains in this private school through high school and that your current interest rate
is 6%, then the present value of your son's private school education is closest to:
A) $106,230
B) $156,000
C) $137,900
D) This problem cannot be solved
As
r = g
, the growth in the payments is exactly offset by the current interest rate.
Therefore the answer is 12,000 × 13 = $156,000.
Tom's portfolio consists solely of an investment in Merck stock.
Merck has an
expected return of 13% and a volatility of 25%.
The market portfolio has an
expected return of 12% and a volatility of 18%.
The riskfree rate is 4%.
Assume
that the CAPM assumptions hold in the market. Assuming that Tom wants to
maintain the current volatility of his portfolio, then the maximum expected return that
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 '10
 Andrew
 Capital Asset Pricing Model, Investing, Modern portfolio theory, Exercise Price

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