If the Interest Rate Is 6% and Will Remain 6

question 4

Multiple Choice

If the interest rate is 6% and will remain 6% forever, how much would a rational investor be willing to pay for an asset that will pay him 8,480 dollars 1 year from now, 1,123 dollars 2 years from now, and nothing at any other time?

• A)9,000 dollars
• B)63,000 dollars
• C)150,000 dollars
• D)8,000 dollars
• E)10,000 dollars

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Definitions:

Equity Method

An accounting technique used by companies to assess their investments in other companies, where the investment's carrying value is adjusted to reflect the investor's share of the investee's income or losses.

Cash Dividends

Payments made by a company out of its profits to its shareholders, usually in the form of cash.

Goodwill

An intangible asset that represents the excess of the purchase price over the fair market value of an acquired company's identifiable assets and liabilities.

Fair Value

The estimated market value of an asset or liability in an arm's length transaction between informed and willing parties.