Assume That You Would Like to Purchase 100 Shares of Preferred

question 55

Multiple Choice

Assume that you would like to purchase 100 shares of preferred stock that pays an annual dividend of $6 per share.However,you have limited resources now,so you cannot afford the purchase price.In fact,the best that you can do now is to invest your money in a bank account earning a simple interest rate of 6 percent,but where interest is compounded daily (assume a 365-day year) .Because the preferred stock is riskier,it has a required annual rate of return of 12 percent (assume that this rate will remain constant over the next 5 years) .For you to be able to purchase this stock at the end of 5 years,how much must you deposit in your bank account today,at t = 0?

• A) $2,985.00
• B) $4,291.23
• C) $3,138.52
• D) $3,704.18
• E) $4,831.25

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Definitions:

Short Run

A period of time during which at least one of a firm's inputs is fixed, limiting its ability to increase production.

Long Run

A period in economics in which all factors of production and costs are variable, allowing for full adjustment to changes.

Total Revenue

Total revenue is the total income generated by a company from its sales of goods or services before any expenses are subtracted.

Total Cost

The sum of all costs incurred in the production of goods or services, including both fixed and variable costs.