QUESTION 12 An auto dealer offers you the choice of “cash back” or “0% APR financing.” You are planning to buy a car of $30,000 sticker price. If you pay for it by cash, you receive a cash back immediately, so the actual car price is lower than the sticker price by the cash back amount. Alternatively, the dealer will lend you the $30,000 purchase price, and you must repay the loan in equal monthly installments (payable at the end of each month) over a five-year period at an APR of 0%. Assume that you can borrow money from a bank for 5 years, with equal monthly payments, at an APR of 6%. What is the minimum cash back amount, if you are to choose the cash back option? a. $5,000 b. $4,137 c. $4,563 d. $3,504
Risk and return
Before understanding the concept of Risk and Return in Financial Management, understanding the two-concept Risk and return individually is necessary.
Capital Asset Pricing Model
Capital asset pricing model, also known as CAPM, shows the relationship between the expected return of the investment and the market at risk. This concept is basically used particularly in the case of stocks or shares. It is also used across finance for pricing assets that have higher risk identity and for evaluating the expected returns for the assets given the risk of those assets and also the cost of capital.
QUESTION 12
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An auto dealer offers you the choice of “cash back” or “0% APR financing.” You are planning to buy a car of $30,000 sticker price. If you pay for it by cash, you receive a cash back immediately, so the actual car price is lower than the sticker price by the cash back amount. Alternatively, the dealer will lend you the $30,000 purchase price, and you must repay the loan in equal monthly installments (payable at the end of each month) over a five-year period at an APR of 0%. Assume that you can borrow money from a bank for 5 years, with equal monthly payments, at an APR of 6%. What is the minimum cash back amount, if you are to choose the cash back option?
a. $5,000
b. $4,137
c. $4,563
d. $3,504
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