Question 1

The concept of compound interest is most appropriately described as:

Accepted Answer

A)  Interest earned on an investment 
B)  The total amount of interest earned over the life of an investment 
C)  Interest earned on interest 
D)  None of the above 
A)  Interest earned on an investment 
B)  The total amount of interest earned over the life of an investment 
C)  Interest earned on interest 
D)  None of the above

Question 2

An investment at 10% nominal rate compounded continuously is equal to an equivalent annual rate of:

Accepted Answer

A)  10.250% 
B)  10.517% 
C)  10.381% 
D)  None of the above 
A)  10.250% 
B)  10.517% 
C)  10.381% 
D)  None of the above

Question 3

If the present value annuity factor at 10% APR for 10 years is 6.1446, what is the equivalent future value annuity factor?

Accepted Answer

A)  3.108 
B)  15.9374 
C)  2.5937 
D)  None of the above 
A)  3.108 
B)  15.9374 
C)  2.5937 
D)  None of the above

Question 4

What is the present value of $10,000 per year perpetuity at an interest rate of 10%?

Accepted Answer

A)  $10,000 
B)  $100,000 
C)  $200,000 
D)  None of the above 
A)  $10,000 
B)  $100,000 
C)  $200,000 
D)  None of the above

Question 5

The present value of a future cash flow can be found by dividing it by an appropriate discount factor.

Accepted Answer

A) True 
 B)False

Question 6

What is the present value of $5000 per year annuity at a discount rate of 10% for 6 years?

Accepted Answer

A)  $21,776.30 
B)  $3,371.91 
C)  $16,760.78 
D)  None of the above 
A)  $21,776.30 
B)  $3,371.91 
C)  $16,760.78 
D)  None of the above

Question 7

Describe how you would go about finding the present value of any annuity given the formula for
the present value of a perpetuity.

Accepted Answer

The present value of any annuity can be

Question 8

Mr. Hopper is expected to retire in 30 years and he wishes accumulate $1,000,000 in his retirement fund by that time. If the interest rate is 12% per year, how much should Mr. Hopper put into the retirement fund each year in order to achieve this goal?

Accepted Answer

A)  $4,143.66 
B)  $8,287.32 
C)  $4,000 
D)  None of the above 
A)  $4,143.66 
B)  $8,287.32 
C)  $4,000 
D)  None of the above

Question 9

If the present value of $1.00 received n years from today at an interest rate of r is 0.3855, then what is the future value of $1.00 invested today at an interest rate of r% for n years?

Accepted Answer

A)  $1.3855 
B)  $2.594 
C)  $1.70 
D)  Not enough information to solve the problem 
A)  $1.3855 
B)  $2.594 
C)  $1.70 
D)  Not enough information to solve the problem

Question 10

The rate of return on any perpetuity is equal to the cash flow multiplied by the price.

Accepted Answer

A) True 
 B)False

Question 11

You would like to have enough money saved to receive a growing annuity for 25 years, growing
At a rate of 4% per year, the first payment being $60,000 after retirement, so that you and your family can lead a good life. How much would you need to save in your retirement fund to achieve this goal? (assume that the growing perpetuity payments start one year from the date of
Your retirement. The interest rate is 12%)?

Accepted Answer

A)  $1,500,000 
B)  $632,390 
C)  $452,165 
D)  None of the above 
A)  $1,500,000 
B)  $632,390 
C)  $452,165 
D)  None of the above

Question 12

The discount rate is used for calculating the NPV is:

Accepted Answer

A)  Determined by the financial markets 
B)  Found by the government 
C)  Found by the CEO 
D)  None of the above 
A)  Determined by the financial markets 
B)  Found by the government 
C)  Found by the CEO 
D)  None of the above

Question 13

You would like to have enough money saved to receive a growing annuity for 20 years, growing at a rate of 5% per year, the first payment being $50,000 after retirement. That way, you hope that you and your family can lead a good life after retirement. How much would you need to save in your retirement fund to achieve this goal.(assume that the growing annuity payments start one year from the date of your retirement. The interest rate is 10%)?

Accepted Answer

A)  $1,000,000 
B)  $425,678.19 
C)  $605,604.20 
D)  None of the above 
A)  $1,000,000 
B)  $425,678.19 
C)  $605,604.20 
D)  None of the above

Question 14

Mr. Hopper is expected to retire in 25 years and he wishes accumulate $750,000 in his retirement fund by that time. If the interest rate is 10% per year, how much should Mr. Hopper put into the retirement fund each year in order to achieve this goal? [Assume that the payments are made at the end of each year]

Accepted Answer

A)  $4,559.44 
B)  $2,500 
C)  $7,626.05 
D)  None of the above 
A)  $4,559.44 
B)  $2,500 
C)  $7,626.05 
D)  None of the above

Question 15

You would like to have enough money saved to receive an $80,000 per year perpetuity after retirement so that you and your family can lead a good life. How much would you need to save in your retirement fund to achieve this goal (assume that the perpetuity payments starts on the day of retirement. The interest rate is 10%)?

Accepted Answer

A)  $1,500,000 
B)  $880,000 
C)  $800,000 
D)  None of the above 
A)  $1,500,000 
B)  $880,000 
C)  $800,000 
D)  None of the above

Question 16

Discuss why a dollar tomorrow cannot be worth less than a dollar the day after tomorrow.

Accepted Answer

If a dollar tomorrow is worth less than

Question 17

A perpetuity is defined as:

Accepted Answer

A)  Equal cash flows at equal intervals of time for a specific number of periods 
B)  Equal cash flows at equal intervals of time forever 
C)  Unequal cash flows at equal intervals of time forever 
D)  None of the above 
A)  Equal cash flows at equal intervals of time for a specific number of periods 
B)  Equal cash flows at equal intervals of time forever 
C)  Unequal cash flows at equal intervals of time forever 
D)  None of the above

Question 18

The following statements regarding the NPV rule and the rate of return rule are true except:

Accepted Answer

A)  Accept a project if its NPV > 0 
B)  Reject a project if the NPV  0 
D)  Accept a project if its rate of return > opportunity cost of capital 
A)  Accept a project if its NPV > 0 
B)  Reject a project if the NPV  0 
D)  Accept a project if its rate of return > opportunity cost of capital

Question 19

Mr. William expects to retire in 30 years and would like to accumulate $1 million in the pension fund. If the annual interest rate is 12% per year, how much should Mr. Williams put into the pension fund each month in order to achieve his goal? Assume that Mr. Williams will deposit the same amount each month into his pension fund and also use monthly compounding.

Accepted Answer

A)  $286.13 
B)  $771.60 
C)  $345.30 
D)  None of the above 
A)  $286.13 
B)  $771.60 
C)  $345.30 
D)  None of the above

Question 20

The rate of return, discount rate, hurdle rate or opportunity cost of capital all means the same.

Accepted Answer

A) True 
 B)False

Exam 2: How to Calculate Present Values

The concept of compound interest is most appropriately described as:

An investment at 10% nominal rate compounded continuously is equal to an equivalent annual rate of:

If the present value annuity factor at 10% APR for 10 years is 6.1446, what is the equivalent future value annuity factor?

What is the present value of $10,000 per year perpetuity at an interest rate of 10%?

The present value of a future cash flow can be found by dividing it by an appropriate discount factor.

What is the present value of $5000 per year annuity at a discount rate of 10% for 6 years?

Describe how you would go about finding the present value of any annuity given the formula for the present value of a perpetuity.

Mr. Hopper is expected to retire in 30 years and he wishes accumulate $1,000,000 in his retirement fund by that time. If the interest rate is 12% per year, how much should Mr. Hopper put into the retirement fund each year in order to achieve this goal?

If the present value of $1.00 received n years from today at an interest rate of r is 0.3855, then what is the future value of $1.00 invested today at an interest rate of r% for n years?

The rate of return on any perpetuity is equal to the cash flow multiplied by the price.

The discount rate is used for calculating the NPV is:

Discuss why a dollar tomorrow cannot be worth less than a dollar the day after tomorrow.

A perpetuity is defined as:

The following statements regarding the NPV rule and the rate of return rule are true except:

The rate of return, discount rate, hurdle rate or opportunity cost of capital all means the same.

Goals and Governance of the Firm

Valuing Bonds

The Value of Common Stocks

Net Present Value and Other Investment Criteria

Making Investment Decisions With the Net Present Value Rule

Introduction to Risk and Return

Portfolio Theory and the Capital Asset Pricing Model

Risk and the Cost of Capital

Project Analysis

Investment, Strategy, and Economic Rents

Agency Problems, Compensation, and Performance Measurement

Efficient Markets and Behavioral Finance

An Overview of Corporate Financing

How Corporations Issue Securities

Payout Policy

Does Debt Policy Matter

How Much Should a Corporation Borrow

Financing and Valuation

Understanding Options

Valuing Options

Real Options

Credit Risk and the Value of Corporate Debt

The Many Different Kinds of Debt

Leasing

Managing Risk

Managing International Risks

Financial Analysis

Financial Planning

Working Capital Management

Mergers

Corporate Restructuring

Governance and Corporate Control Around the World

Filters