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Date Posted: 07:27:02 05/02/02 Thu
Author: Dr. D.
Subject: Re: Practice exam Q's
In reply to: Nathan 's message, "Practice exam Q's" on 21:04:13 05/01/02 Wed

>On the Spring '00 exam: For #14, aren't both "D" AND
>"B" correct? How can a declining dividend fit into
>the constant-growth model?

Think of declining dividends as having a negative growth rate. All that's required is that the growth rate be constant and less than the req'd rate of return.

>Also- how on earth do you do #21? my buddy and I
>spent 20 minutes trying and even "cheated" by looking
>at the answer and working backward!! Still couldn't
>get it! I'm either retarded (which I won't rule out)
>or the correct answer is not there!

I can't comment on your mental status, but the answer is there. If the project pays back in EXACTLY two years, it must have an initial cost of $5000. So, set CF0 as -5000 and go from there. Just to check your understanding, if the payback period was 2 1/3 years, what would the initial cost be? It would be $6,000.

>And- on the practice exam titled: "Practice final exam
>Number 2" for #7..there again, how on earth do you do
>this?! What rate do you use to account for inflation,
>etc, etc.?

Inflation means that your retirement needs will increase each year (i.e. things cost more, so $1 won't buy as much in the future as it will today). So, step 1 is to calclate the FV of $1 million for 30 years at 5% annually - you get a FV of $4,321,942.

Next use the $4,321,942 as your "target". The 2nd step is to calculate the payments necessary to get you there:
FV=4,321,942; N=30; I=12; PMT=??=$15,989.87 (remember - this is BEGIN mode for this step).

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