The Interest Rate Will Be 10% for One More Year

question 9

Multiple Choice

The interest rate will be 10% for one more year, but a year from now, it will fall to 5% and stay at 5% forever.What is the market value of an investment that is sure to pay $440 a year forever, starting two years from today?

• A)$4,000
• B)$8,800
• C)$4,400
• D)$8,000
• E)$9,000

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Definitions:

Non-Controlling Interest

The portion of equity in a subsidiary not owned by the parent company, reflecting minority shareholders' stake in the entity's net assets.

Equity Method

An accounting technique used to record investments in other companies, where the investment's value is adjusted based on the investor's share of the investee's profit or loss.

Acquisition Differential

The difference between the cost of acquiring a company and the sum of the fair market values of the identifiable assets acquired minus liabilities assumed.

Equity Method

An accounting technique used to record investments in other companies, where the investment is initially recorded at cost and adjusted thereafter for the investor's share of the investee's net income or loss.