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:

Pool Funds

The act of combining resources, often money, from multiple sources for a common investment purpose.

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Activities relating to managing the capital and funding of a business to ensure it can meet its financial obligations and continue operations.

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Corporate Officers

Individuals appointed to manage the day-to-day operations and make major corporate decisions in a company.