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## BUS 401 Week 2, DQ 1, Annuity and Capital Asset Pricing

by: kimwood Notetaker

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# BUS 401 Week 2, DQ 1, Annuity and Capital Asset Pricing

Marketplace > BUS 401 Week 2 DQ 1 Annuity and Capital Asset Pricing
kimwood Notetaker
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BUS 401 Week 2, DQ 1, Annuity and Capital Asset Pricing
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This 3 page Study Guide was uploaded by kimwood Notetaker on Friday November 13, 2015. The Study Guide belongs to a course at a university taught by a professor in Fall. Since its upload, it has received 18 views.

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Date Created: 11/13/15
Annuity and Capital Asset Pricing From Chapters 5 and 6 complete Study Problems 5­6 (page 162) and 6­4 (page 196) and post the answers to the  discussion board. Remember to complete all parts of the problems and report the results of your analysis. Do not forget to  show the necessary steps and explain how your attained that outcome. Respond to at least two of your classmates’  postings. 5-6. (Present value of an annuity) What is the present value of the following annuities? a. \$2,500 a year for 10 years discounted back to the present at 7 percent 1 1 n PV C  (1r) annuity r 1 = 1 (1.07)0 \$2,500 0.07 = \$2,500 × 7.024 = \$17,560 b. \$70 a year for 3 years discounted back to the present at 3 percent 1 1 = (1.03) \$70 0.03 = \$70 × 2.829 = \$198.03 c. \$280 a year for 7 years discounted back to the present at 6 percent 1 1 7 = \$280 (1.06) 0.06 = \$280 × 5.582 = \$1,562.96 d. \$500 a year for 10 years discounted back to the present at 10 percent 1 1 = (1.10) \$500 0.10 = \$500 × 6.145 = \$3,072.5 6-4.(Required rate of return using CAPM) a. Compute a fair rate of return for Intel common stock, which has a 1.2 beta. The risk-free rate is 6 percent, and the market portfolio (New York Stock Exchange stocks) has an expected return of 16 percent. a) = + Beta = 6 % + 1.2 (16% - 6%) = 18% b. Why is the rate you computed a fair rate? The rate that we computed is fair as it rate compensates the investor for the time value of money and for risk. And the investor has considered only non- diversifiable risk which is appropriate.

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