Question 1) A state's lottery winner is promised $200,000 a year for twenty years (starting at the end of the first year). How much must the state invest now to guarantee the prize if the state can earn annually 7 percent on its funds? How much must the state invest if the annual payments were made at the beginning of the year?
Question 2) A homeowner has a ten year home-improvement loan for $36,875. What are the annual payments required by the loan if the annual rate of interest is 10 percent?
Question 3. Brian has a capital gain of $3,700 and a capital loss of $5,100 for a net long-term capital loss of $1,400. This reduces his taxable income from other sources and reduces taxes by (.35)($1,400) = $490.
Question 4. Barbara has a short-term capital loss that is used to offset the $2,000 long-term capital gain. The remaining $4,000 is used to offset $3,000 of current income from other sources with $1,000 being carried forward to the next year. The tax savings in the current year is (0.35)($3,000) = $1,050.
Question 5. The risk free rate of return is 8 percent; the expected rate of return on the market is 12 percent. Stock X has a beta coefficient of 1.3, an earnings and dividend growth rate of 7 percent, and a current dividend of $2.40. If the stock is selling for $35, what should you do?
Question 6. Presently, Stock A pays a dividend of $2.00 a share, and you expect the dividend to grow rapidly for the next four years at 20 percent. Thus the dividend payments will be:
Year Dividend
1 $1.20
2 1.44
3 1.73
4 2.07
After this initial period of super growth, the rate of increase in the dividend should decline to 8 percent. If you want to earn 12 percent on investments in common stock, what is the maximum you should pay for this stock?
Question 7. You bought a stock for $20 and sold it for $59.72 after six years. What was the annual rate of return?
Question 8. You bought a stock for $28.29 that paid the following dividends:
Year 1 2 3
Dividend $1.00 $1.50 $1.80
After the third year, you sold the stock for $35. What was the annual rate of return?