What Is the Value in Year 3 of a $500

question 73

Multiple Choice

What is the value in year 3 of a $500 cash flow made in year 5 when interest rates are 6 percent?

• A) $374
• B) $420
• C) $440
• D) $445

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Definitions:

Debt-Equity Ratio

Debt-Equity Ratio measures a company's financial leverage, calculated by dividing its total liabilities by its stockholders' equity.

Capital Asset Pricing Model

A model that describes the relationship between systematic risk and expected return for assets, particularly stocks, used to assess the risk of adding a new asset to a portfolio.

M&M Proposition II

This financial theory, originating from Modigliani and Miller, states that a firm's cost of equity increases as the firm increases its level of debt financing, holding everything else constant.

Capital Structure

The mix of different forms of financial securities used by a firm to finance its operations, typically consisting of debt and equity.