Scenario 15.5: Consider the Following Information Based on a Story by Hubert

question 5

Multiple Choice

Scenario 15.5:
Consider the following information based on a story by Hubert B. Herring that appeared in The New York Times on Catherine has a two-pack-a-day cigarette habit. Cigarettes cost about $2 per pack. Catherine is 20. On a $250,000 life insurance policy, her annual premiums are $1200; a non-smoker's would be $500. Smokers earn from 4 to 8 percent less in income than non-smokers (lower productivity and more absence, among other things) . In this case Catherine's income is expected to be $20,500 per year over her lifetime whereas $22,000 is an average non-smoker's salary. Let interest rates are expected to be 3%.
-Refer to Scenario 15.5. What formula shows the present value of the amount Catherine would save on life insurance premiums over her lifetime by stopping smoking?

• A) $700 times 60
• B) $700 (1 + 1/1.03 + 1/1.03² + 1/1.03³ + ... + 1/1.03⁶⁰)
• C) $700 (1 + 1/1.03 + 1/1.03² + 1/1.03³ + ... + 1/1.03⁸⁰)
• D) $42,000 / (1 + 1.03 + 1.03² + ... + 1.03⁶⁰)
• E) $42,000 / (1 + 1.03 + 1.03² + ... + 1.03⁸⁰)

Calculate and interpret the mean and standard deviation in probability distributions.

Understand the application of the relative frequency method in developing discrete probability distributions.

Analyze and compute probabilities using various probability distributions in real-world situations.

Identify and apply the concepts of discrete and continuous random variables.

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Definitions:

Annual Dividend

The total dividend payment a company offers to its shareholders in a year.

Expected Return

The weighted average of all possible returns for an investment, considering the probabilities of each outcome.

Annual Dividend

The total dividend payment a company makes to its shareholders in a year, often derived from its net income.

Growth Rate

The rate at which a company's earnings, revenue, or other financial metric increases on a year-to-year basis.