Question 1

What is the present value of the following cash flow stream at a rate of 8.0%?

Accepted Answer

A)  $7,917 
B)  $8,333 
C)  $8,772 
D)  $9,233 
E)  $9,695 
A)  $7,917 
B)  $8,333 
C)  $8,772 
D)  $9,233 
E)  $9,695

Question 2

Your uncle has $375,000 and wants to retire. He expects to live for another 25 years, and he also expects to earn 7.5% on his invested funds. How much could he withdraw at the beginning of each of the next 25 years and end up with zero in the account?

Accepted Answer

A)  $28,243.21 
B)  $29,729.70 
C)  $31,294.42 
D)  $32,859.14 
E)  $34,502.10 
A)  $28,243.21 
B)  $29,729.70 
C)  $31,294.42 
D)  $32,859.14 
E)  $34,502.10

Question 3

Which of the following bank accounts has the highest effective annual return?

Accepted Answer

A)  An account that pays 8% nominal interest with monthly compounding. 
B)  An account that pays 8% nominal interest with annual compounding. 
C)  An account that pays 7% nominal interest with daily (365-day) compounding. 
D)  An account that pays 7% nominal interest with monthly compounding. 
E)  An account that pays 8% nominal interest with daily (365-day) compounding. 
A)  An account that pays 8% nominal interest with monthly compounding. 
B)  An account that pays 8% nominal interest with annual compounding. 
C)  An account that pays 7% nominal interest with daily (365-day) compounding. 
D)  An account that pays 7% nominal interest with monthly compounding. 
E)  An account that pays 8% nominal interest with daily (365-day) compounding.

Question 4

All other things held constant, the present value of a given annual annuity increases as the number of periods per year increases.

Accepted Answer

A) True 
 B)False

Question 5

Your 75-year-old grandmother expects to live for another 15 years. She currently has $1,000,000 of savings, which is invested to earn a guaranteed 5% rate of return. If inflation averages 2% per year, how much can she withdraw (to the nearest dollar) at the beginning of each year and keep the withdrawals constant in real terms, i.e., growing at the same rate as inflation and thus enabling her to maintain a constant standard of living?

Accepted Answer

A)  $65,632 
B)  $72,925 
C)  $81,027 
D)  $89,130 
E)  $98,043 
A)  $65,632 
B)  $72,925 
C)  $81,027 
D)  $89,130 
E)  $98,043

Question 6

As a result of compounding, the effective annual rate on a bank deposit (or a loan) is always equal to or greater than the nominal rate on the deposit (or loan).

Accepted Answer

A) True 
 B)False

Question 7

Your aunt has $500,000 invested at 5.5%, and she now wants to retire. She wants to withdraw $45,000 at the beginning of each year, beginning immediately. She also wants to have $50,000 left to give you when she ceases to withdraw funds from the account. What is the maximum number of $45,000 withdrawals that she can make and still have at least $50,000 left in the account? (Hint: If your solution for N is not an integer, round down to the nearest whole number.)

Accepted Answer

A)  13 
B)  14 
C)  15 
D)  16 
E)  17 
A)  13 
B)  14 
C)  15 
D)  16 
E)  17

Question 8

Your aunt is about to retire, and she wants to sell some of her stock and buy an annuity that will provide her with income of $50,000 per year for 30 years, beginning a year from today. The going rate on such annuities is 7.25%. How much would it cost her to buy such an annuity today?

Accepted Answer

A)  $574,924 
B)  $605,183 
C)  $635,442 
D)  $667,214 
E)  $700,575 
A)  $574,924 
B)  $605,183 
C)  $635,442 
D)  $667,214 
E)  $700,575

Question 9

Suppose the U.S. Treasury offers to sell you a bond for $747.25. No payments will be made until the bond matures 5 years from now, at which time it will be redeemed for $1,000. What interest rate would you earn if you bought this bond at the offer price?

Accepted Answer

A)  4.37% 
B)  4.86% 
C)  5.40% 
D)  6.00% 
E)  6.60% 
A)  4.37% 
B)  4.86% 
C)  5.40% 
D)  6.00% 
E)  6.60%

Question 10

You want to quit your job and go back to school for a law degree 4 years from now, and you plan to save $3,500 per year, beginning immediately. You will make 4 deposits in an account that pays 5.7% interest. Under these assumptions, how much will you have 4 years from today?

Accepted Answer

A)  $16,112 
B)  $16,918 
C)  $17,763 
D)  $18,652 
E)  $19,584 
A)  $16,112 
B)  $16,918 
C)  $17,763 
D)  $18,652 
E)  $19,584

Question 11

You deposit $1,000 today in a savings account that pays 3.5% interest, compounded annually. How much will your account be worth at the end of 25 years?

Accepted Answer

A)  $2,245.08 
B)  $2,363.24 
C)  $2,481.41 
D)  $2,605.48 
E)  $2,735.75 
A)  $2,245.08 
B)  $2,363.24 
C)  $2,481.41 
D)  $2,605.48 
E)  $2,735.75

Question 12

Your uncle has $300,000 invested at 7.5%, and he now wants to retire. He wants to withdraw $35,000 at the end of each year, beginning at the end of this year. He also wants to have $25,000 left to give you when he ceases to withdraw funds from the account. What is the maximum number of $35,000 withdrawals that he can make and still have at least $25,000 left in the account? (Hint: If your solution for N is not an integer, round down to the nearest whole number.)

Accepted Answer

A)  12 
B)  13 
C)  14 
D)  15 
E)  16 
A)  12 
B)  13 
C)  14 
D)  15 
E)  16

Question 13

The greater the number of compounding periods within a year, then (1) the greater the future value of a lump sum investment at Time 0 and (2) the smaller the present value of a given lump sum to be received at some future date.

Accepted Answer

A) True 
 B)False

Question 14

The greater the number of compounding periods within a year, then (1) the greater the future value of a lump sum investment at Time 0 and (2) the greater the present value of a given lump sum to be received at some future date.

Accepted Answer

A) True 
 B)False

Question 15

Which of the following statements is CORRECT?

Accepted Answer

A)  The cash flows for an ordinary (or deferred) annuity all occur at the beginning of the periods. 
B)  If a series of unequal cash flows occurs at regular intervals, such as once a year, then the series is by definition an annuity. 
C)  The cash flows for an annuity due must all occur at the ends of the periods. 
D)  The cash flows for an annuity must all be equal, and they must occur at regular intervals, such as once a year or once a month. 
E)  If some cash flows occur at the beginning of the periods while others occur at the ends, then we have what the textbook defines as a variable annuity. 
A)  The cash flows for an ordinary (or deferred) annuity all occur at the beginning of the periods. 
B)  If a series of unequal cash flows occurs at regular intervals, such as once a year, then the series is by definition an annuity. 
C)  The cash flows for an annuity due must all occur at the ends of the periods. 
D)  The cash flows for an annuity must all be equal, and they must occur at regular intervals, such as once a year or once a month. 
E)  If some cash flows occur at the beginning of the periods while others occur at the ends, then we have what the textbook defines as a variable annuity.

Question 16

What's the present value of a 4-year ordinary annuity of $2,250 per year plus an additional $3,000 at the end of Year 4 if the interest rate is 5%?

Accepted Answer

A)  $8,509 
B)  $8,957 
C)  $9,428 
D)  $9,924 
E)  $10,446 
A)  $8,509 
B)  $8,957 
C)  $9,428 
D)  $9,924 
E)  $10,446

Question 17

You are negotiating to make a 7-year loan of $25,000 to Breck Inc. To repay you, Breck will pay $2,500 at the end of Year 1, $5,000 at the end of Year 2, and $7,500 at the end of Year 3, plus a fixed but currently unspecified cash flow, X, at the end of each year from Year 4 through Year 7. Breck is essentially riskless, so you are confident the payments will be made. You regard 8% as an appropriate rate of return on a low risk but illiquid 7-year loan. What cash flow must the investment provide at the end of each of the final 4 years, that is, what is X?

Accepted Answer

A)  $4,271.67 
B)  $4,496.49 
C)  $4,733.15 
D)  $4,969.81 
E)  $5,218.30 
A)  $4,271.67 
B)  $4,496.49 
C)  $4,733.15 
D)  $4,969.81 
E)  $5,218.30

Question 18

Ten years ago, Spielberg Inc. earned $0.50 per share. Its earnings this year were $2.20. What was the growth rate in earnings per share (EPS) over the 10-year period?

Accepted Answer

A)  15.17% 
B)  15.97% 
C)  16.77% 
D)  17.61% 
E)  18.49% 
A)  15.17% 
B)  15.97% 
C)  16.77% 
D)  17.61% 
E)  18.49%

Question 19

Which of the following statements is CORRECT?

Accepted Answer

A)  If you have a series of cash flows, each of which is positive, you can solve for I, where the solution value of I causes the PV of the cash flows to equal the cash flow at Time 0. 
B)  If you have a series of cash flows, and CF0 is negative but each of the following CFs is positive, you can solve for I, but only if the sum of the undiscounted cash flows exceeds the cost. 
C)  To solve for I, one must identify the value of I that causes the PV of the positive CFs to equal the absolute value of the PV of the negative CFs. This is, essentially, a trial-and-error procedure that is easy with a computer or financial calculator but quite difficult otherwise. 
D)  If you solve for I and get a negative number, then you must have made a mistake. 
E)  If CF0 is positive and all the other CFs are negative, then you cannot solve for I. 
A)  If you have a series of cash flows, each of which is positive, you can solve for I, where the solution value of I causes the PV of the cash flows to equal the cash flow at Time 0. 
B)  If you have a series of cash flows, and CF0 is negative but each of the following CFs is positive, you can solve for I, but only if the sum of the undiscounted cash flows exceeds the cost. 
C)  To solve for I, one must identify the value of I that causes the PV of the positive CFs to equal the absolute value of the PV of the negative CFs. This is, essentially, a trial-and-error procedure that is easy with a computer or financial calculator but quite difficult otherwise. 
D)  If you solve for I and get a negative number, then you must have made a mistake. 
E)  If CF0 is positive and all the other CFs are negative, then you cannot solve for I.

Question 20

Suppose you have $2,000 and plan to purchase a 10-year certificate of deposit (CD) that pays 6.5% interest, compounded annually. How much will you have when the CD matures?

Accepted Answer

A)  $3,754.27 
B)  $3,941.99 
C)  $4,139.09 
D)  $4,346.04 
E)  $4,563.34 
A)  $3,754.27 
B)  $3,941.99 
C)  $4,139.09 
D)  $4,346.04 
E)  $4,563.34

Exam 4: Time Value of Money

What is the present value of the following cash flow stream at a rate of 8.0%?

Your uncle has $375,000 and wants to retire. He expects to live for another 25 years, and he also expects to earn 7.5% on his invested funds. How much could he withdraw at the beginning of each of the next 25 years and end up with zero in the account?

Which of the following bank accounts has the highest effective annual return?

All other things held constant, the present value of a given annual annuity increases as the number of periods per year increases.

As a result of compounding, the effective annual rate on a bank deposit (or a loan) is always equal to or greater than the nominal rate on the deposit (or loan).

Your aunt is about to retire, and she wants to sell some of her stock and buy an annuity that will provide her with income of $50,000 per year for 30 years, beginning a year from today. The going rate on such annuities is 7.25%. How much would it cost her to buy such an annuity today?

Suppose the U.S. Treasury offers to sell you a bond for $747.25. No payments will be made until the bond matures 5 years from now, at which time it will be redeemed for $1,000. What interest rate would you earn if you bought this bond at the offer price?

You want to quit your job and go back to school for a law degree 4 years from now, and you plan to save $3,500 per year, beginning immediately. You will make 4 deposits in an account that pays 5.7% interest. Under these assumptions, how much will you have 4 years from today?

You deposit $1,000 today in a savings account that pays 3.5% interest, compounded annually. How much will your account be worth at the end of 25 years?

The greater the number of compounding periods within a year, then (1) the greater the future value of a lump sum investment at Time 0 and (2) the smaller the present value of a given lump sum to be received at some future date.

The greater the number of compounding periods within a year, then (1) the greater the future value of a lump sum investment at Time 0 and (2) the greater the present value of a given lump sum to be received at some future date.

Which of the following statements is CORRECT?

What's the present value of a 4-year ordinary annuity of $2,250 per year plus an additional $3,000 at the end of Year 4 if the interest rate is 5%?

Ten years ago, Spielberg Inc. earned $0.50 per share. Its earnings this year were $2.20. What was the growth rate in earnings per share (EPS) over the 10-year period?

Which of the following statements is CORRECT?

Suppose you have $2,000 and plan to purchase a 10-year certificate of deposit (CD) that pays 6.5% interest, compounded annually. How much will you have when the CD matures?

An Overview of Financial Management and the Financial Environment

Financial Statements, Cash Flow, and Taxes

Analysis of Financial Statements Part 2 Fixed Income Securities

Bonds, Bond Valuation, and Interest Rates

Risk, Return, and the Capital Asset Pricing Model

Stocks, Stock Valuation, and Stock Market Equilibrium

Financial Options and Applications in Corporate Finance

The Cost of Capital

The Basics of Capital Budgeting: Evaluating Cash Flows

Cash Flow Estimation and Risk Analysis

Financial Planning and Forecasting Financial Statements

Corporate Valuation, Value-Based Management and Corporate Governance

Distributions to Shareholders: Dividends and Repurchases

Capital Structure Decisions

Working Capital Management

Multinational Financial Management

Lease Financing

Hybrid Financing: Preferred Stock, Warrants, and Convertibles

Initial Public Offerings, Investment Banking, and Financial Restructuring

Mergers, Lbos, Divestitures, and Holding Companies

Bankruptcy, Reorganization, and Liquidation

Derivatives and Risk Management

Portfolio Theory, Asset Pricing Models, and Behavioral Finance

Real Options

Analysis of Capital Structure Theory

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