The Solution to This Problem Requires Time Value of Money

question 21

Multiple Choice

The solution to this problem requires time value of money calculations. Reference to Tables 9-1 through 9-4 in the text is necessary to complete the calculations. Denise wants to help pay for her niece's college tuition. Her niece will begin college in one year. How much would Denise need to put into a savings account today at 6% so that her niece can withdraw $10,000 per year for 4 years, and reduce the account balance to zero at the end of the 4 years?

• A) $34,650
• B) $37,720
• C) $37,600
• D) $31,680

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Definitions:

P/E Ratios

Price-to-Earnings Ratio, a valuation metric comparing the current share price of a company to its per-share earnings.

Mispriced Securities

Securities whose market price is significantly different from their intrinsic value due to inefficiencies in the market.

Free Cash Flow

The amount of cash generated by a company after accounting for capital expenditures necessary to maintain or expand the asset base.

Market Capitalization Rate

The expected return on an investment in a company, based on its current market capitalization and future profit projections.