When Calculating the Present Value of an Ordinary Annuity, It

question 67

Multiple Choice

When calculating the present value of an ordinary annuity, it is assumed that:

• A) cash flows will be reinvested at the required rate of return.
• B) cash flows are withdrawn at the end of each year.
• C) the investor will wait until the end of the investment period to withdraw cash flows.
• D) Both cash flows will be reinvested at the required rate of return and cash flows are withdrawn at the end of each year are correct.

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Definitions:

Stockholders' Equity

The amount of assets remaining in a company after all liabilities have been deducted, essentially representing the owners' claim on the company's assets.

Market Price

is the current price at which an asset or service can be bought or sold in a competitive marketplace.

Common Stock

A type of equity security that represents ownership in a corporation, entitling the holder to a share of the company's profits through dividends and/or capital appreciation.

Net Profit Margin

A profitability ratio calculated by dividing net income by revenue, indicating the percentage of each dollar of revenue that results in net profit.