Use the Following Information to Answer the Question(s) Below

question 22

Multiple Choice

Use the following information to answer the question(s) below.
Consider the following four alternatives:
1. $132 received in two years.
2. $160 received in five years.
3. $200 received in eight years.
4. $220 received in ten years.
-The ranking of the four alternatives from most valuable to least valuable if the interest rate is 7% per year would be:

• A) 1, 2, 3, 4
• B) 4, 3, 2, 1
• C) 3, 4 2, 1
• D) 2, 3, 1, 4

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Definitions:

Expected Earnings

The forecasted income of a company, often estimated by analysts based on historical data and future projections, indicating potential future profitability.

Miller Model

A theory on dividend policy developed by Merton Miller, which considers the impact of taxes and bankruptcy costs on a company’s optimal capital structure.

MM Model

Modigliani-Miller Theorem; a foundational concept in corporate finance that proposes, under certain market conditions, the valuation of a firm is unaffected by its capital structure.

Personal Taxes

Taxes levied on individuals' income, capital gains, and other forms of personal wealth.