Suppose the cash flows for a financial asset's payment for years 1 through 5 are $80. That is, CFt = $80 for t (t = 1, ... ,5). Further assume the the discount rate is 8.00% and at the end of the five years that the financial asset will pay back $1,000 in addition to the $80. Finally, assume a broker's commission of $30 is imposed by brokers to buy or sell the financial asset and that a government entity imposes a transfer tax of $20 on each transaction. To the nearest dollar, what is the correct price for this financial asset?

Question

Quizplus · Accepted Answer

The present value of the cash flows is calculated by discounting each cash flow at 8% and summing them up. The present value of the $80 payments for 5 years and the $1,000 payment at the end of year 5 is approximately $966. Subtracting the broker's commission of $30 and the transfer tax of $20 gives a net price of $916.

Suppose the Cash Flows for a Financial Asset's Payment for Years