You plan to analyze the value of a potential investment by calculating the sum of the present values of its expected cash flows. Which of the following would lower the calculated value of the investment?
A. The cash flows are in the form of a deferred annuity, and they total to $100,000. You learn that the annuity lasts for only 5 rather than 10 years, hence that each payment is for $20,000 rather than for $10,000.
B. The discount rate increases.
C. The riskiness of the investment's cash flows decreases.
D. The total amount of cash flows remains the same, but more of the cash flows are received in the earlier years and less are received in the later years.
E. The discount rate decreases.
Answer: B
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Protective Corporation acquired 70 percent of the common shares and 60 percent of the preferred shares of Safety Corporation at underlying book value on January 1, 20X6. At that date, the fair value of the noncontrolling interest in Safety's common stock was equal to 30 percent of the book value of its common stock. Safety's balance sheet at the time of acquisition contained the following balances: Assets$700,000 Liabilities$110,000 Preferred Stock 100,000 Common Stock 200,000 Retained Earnings 290,000 Total Assets$700,000 Total Liabilities and Equities$700,000 The preferred shares are cumulative and have an 8 percent annual dividend rate and are three years in arrears on January 1, 20X6. All of the $10 par value preferred shares are callable
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