Jasmine Has Two Investment Choices

question 32

Multiple Choice

Jasmine has two investment choices. Alternative 1 requires an immediate outlay of $150 000 and offers a return of $417 000 after seven years. Alternative 2 requires an immediate outlay of $180 000 in return for which $25 000 will be received at the end of every six months for the next seven years. Alternative 3 requires an immediate outlay of $200 000 in return for which $60 000 will be received at the end of every year for the next seven years. The required rate of return on investment is 6.58% compounded semi-annually. What is Jasmine's most preferred option?

• A) Alternative 1
• B) Alternative 2
• C) Alternative 3
• D) Alternative 3 or Alternative 2, as both are essentially same
• E) Alternative 1 or Alternative 2, as both are essentially same

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Definitions:

Market Price

The current value at which an asset or service can be bought or sold in a marketplace.

Dividend Payout Ratio

Dividend payout ratio is a financial metric that shows what proportion of a company's earnings are distributed to shareholders as dividends.

Market Price

The price at which an asset or service can be bought or sold in the market.

Dividends

Payments made to shareholders out of a corporation's earnings, typically on a regular basis.