Question 1

A "growing annuity" is a cash flow stream that grows at a constant rate for a specified number of periods.

Accepted Answer

A) True 
 B)False

Question 2

You are considering investing in a European bank account that pays a nominal annual rate of 18%, compounded monthly.If you invest $5,000 at the beginning of each month, how many months would it take for your account to grow to $250,000? Round fractional months up.

Accepted Answer

A)  23 
B)  27 
C)  32 
D)  38 
E)  44 
A)  23 
B)  27 
C)  32 
D)  38 
E)  44

Question 3

Suppose you just won the state lottery, and you have a choice between receiving $2,550,000 today or a 20-year annuity of $250,000, with the first payment coming one year from today.What rate of return is built into the annuity? Disregard taxes.

Accepted Answer

A)  7.12% 
B)  7.49% 
C)  7.87% 
D)  8.26% 
E)  8.67% 
A)  7.12% 
B)  7.49% 
C)  7.87% 
D)  8.26% 
E)  8.67%

Question 4

Now that your uncle has decided to retire, he wants to buy an annuity that will provide him with $85,000 of income a year for 25 years, with the first payment coming immediately.The going rate on such annuities is 5.15%.How much would it cost him to buy the annuity today?

Accepted Answer

A)  $1,063,968 
B)  $1,119,966 
C)  $1,178,912 
D)  $1,240,960 
E)  $1,303,008 
A)  $1,063,968 
B)  $1,119,966 
C)  $1,178,912 
D)  $1,240,960 
E)  $1,303,008

Question 5

You are in negotiations to make a 7-year loan of $25,000 to DeVille Corporation.To repay you, DeVille 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.You are confident the payments will be made, since DeVille is essentially riskless.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 6

Your investment account pays 8.0%, compounded annually.If you invest $5,000 today, how many years will it take for your investment to grow to $9,140.20?

Accepted Answer

A)  5.14 
B)  5.71 
C)  6.35 
D)  7.05 
E)  7.84 
A)  5.14 
B)  5.71 
C)  6.35 
D)  7.05 
E)  7.84

Question 7

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

Accepted Answer

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

Question 8

Which of the following statements regarding a 20-year (240-month) $225,000, fixed-rate mortgage is CORRECT? (Ignore taxes and transactions costs.)

Accepted Answer

A)  The outstanding balance declines at a slower rate in the later years of the loan's life. 
B)  The remaining balance after three years will be $225,000 less one third of the interest paid during the first three years. 
C)  Because it is a fixed-rate mortgage, the monthly loan payments (which include both interest and principal payments) are constant. 
D)  Interest payments on the mortgage will increase steadily over time, but the total amount of each payment will remain constant. 
E)  The proportion of the monthly payment that goes towards repayment of principal will be lower 10 years from now than it will be the first year. 
A)  The outstanding balance declines at a slower rate in the later years of the loan's life. 
B)  The remaining balance after three years will be $225,000 less one third of the interest paid during the first three years. 
C)  Because it is a fixed-rate mortgage, the monthly loan payments (which include both interest and principal payments) are constant. 
D)  Interest payments on the mortgage will increase steadily over time, but the total amount of each payment will remain constant. 
E)  The proportion of the monthly payment that goes towards repayment of principal will be lower 10 years from now than it will be the first year.

Question 9

Cochrane Associate's net sales last year were $525 million.If sales grow at 7.5% per year, how large (in millions) will they be 8 years later?

Accepted Answer

A)  $845.03 
B)  $889.51 
C)  $936.33 
D)  $983.14 
E)  $1,032.30 
A)  $845.03 
B)  $889.51 
C)  $936.33 
D)  $983.14 
E)  $1,032.30

Question 10

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.When she makes her last withdrawal (at the beginning of a year), she also wants to have enough left in the account so that you can make a final withdrawal of $50,000 at the end of that year (her last withdrawal is at the beginning of the year, your withdrawal is at the end of that same year).What is the maximum number of $45,000 withdrawals that she can make and still have enough in the account so that you can make a $50,000 withdrawal at the end of the year of her last withdrawal? (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 11

Suppose United Bank offers to lend you $10,000 for one year at a nominal annual rate of 8.00%, but you must make interest payments at the end of each quarter and then pay off the $10,000 principal amount at the end of the year.What is the effective annual rate on the loan?

Accepted Answer

A)  8.24% 
B)  8.45% 
C)  8.66% 
D)  8.88% 
E)  9.10% 
A)  8.24% 
B)  8.45% 
C)  8.66% 
D)  8.88% 
E)  9.10%

Question 12

Your bank account pays an 8% nominal rate of interest.The interest is compounded quarterly.Which of the following statements is CORRECT?

Accepted Answer

A)  The periodic rate of interest is 8% and the effective rate of interest is also 8%. 
B)  The periodic rate of interest is 2% and the effective rate of interest is 4%. 
C)  The periodic rate of interest is 8% and the effective rate of interest is greater than 8%. 
D)  The periodic rate of interest is 4% and the effective rate of interest is less than 8%. 
E)  The periodic rate of interest is 2% and the effective rate of interest is greater than 8%. 
A)  The periodic rate of interest is 8% and the effective rate of interest is also 8%. 
B)  The periodic rate of interest is 2% and the effective rate of interest is 4%. 
C)  The periodic rate of interest is 8% and the effective rate of interest is greater than 8%. 
D)  The periodic rate of interest is 4% and the effective rate of interest is less than 8%. 
E)  The periodic rate of interest is 2% and the effective rate of interest is greater than 8%.

Question 13

Suppose a State of North Carolina bond will pay $1,000 ten years from now.If the going interest rate on these 10-year bonds is 5.5%, how much is the bond worth today?

Accepted Answer

A)  $585.43 
B)  $614.70 
C)  $645.44 
D)  $677.71 
E)  $711.59 
A)  $585.43 
B)  $614.70 
C)  $645.44 
D)  $677.71 
E)  $711.59

Question 14

Suppose you deposited $5,000 in a bank account that pays 5.25% with daily compounding based on a 360-day year.How much would be in the account after 8 months, assuming each month has 30 days?

Accepted Answer

A)  $5,178.09 
B)  $5,436.99 
C)  $5,708.84 
D)  $5,994.28 
E)  $6,294.00 
A)  $5,178.09 
B)  $5,436.99 
C)  $5,708.84 
D)  $5,994.28 
E)  $6,294.00

Question 15

A "growing annuity" is any cash flow stream that grows over time.

Accepted Answer

A) True 
 B)False

Question 16

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 increase the calculated value of the investment?

Accepted Answer

A)  The discount rate increases. 
B)  The cash flows are in the form of a deferred annuity, and they total to $100,000.You learn that the annuity lasts for 10 years rather than 5 years, hence that each payment is for $10,000 rather than for $20,000. 
C)  The discount rate decreases. 
D)  The riskiness of the investment's cash flows increases. 
E)  The total amount of cash flows remains the same, but more of the cash flows are received in the later years and less are received in the earlier years. 
A)  The discount rate increases. 
B)  The cash flows are in the form of a deferred annuity, and they total to $100,000.You learn that the annuity lasts for 10 years rather than 5 years, hence that each payment is for $10,000 rather than for $20,000. 
C)  The discount rate decreases. 
D)  The riskiness of the investment's cash flows increases. 
E)  The total amount of cash flows remains the same, but more of the cash flows are received in the later years and less are received in the earlier years.

Question 17

Brockman Corporation's earnings per share were $3.50 last year, and its growth rate during the prior 5 years was 9.0% per year.If that growth rate were maintained, how many years would it take for Brockman's EPS to triple?

Accepted Answer

A)  9.29 
B)  10.33 
C)  11.47 
D)  12.75 
E)  14.02 
A)  9.29 
B)  10.33 
C)  11.47 
D)  12.75 
E)  14.02

Question 18

When a loan is amortized, a relatively low percentage of the payment goes to reduce the outstanding principal in the early years, and the principal repayment's percentage increases in the loan's later years.

Accepted Answer

A) True 
 B)False

Question 19

Which of the following statements is CORRECT?

Accepted Answer

A)  If CF0 is positive and all the other CFs are negative, then you can still solve for I. 
B)  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. 
C)  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. 
D)  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 FV of the negative CFs.It is impossible to find the value of I without a computer or financial calculator. 
E)  If you solve for I and get a negative number, then you must have made a mistake. 
A)  If CF0 is positive and all the other CFs are negative, then you can still solve for I. 
B)  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. 
C)  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. 
D)  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 FV of the negative CFs.It is impossible to find the value of I without a computer or financial calculator. 
E)  If you solve for I and get a negative number, then you must have made a mistake.

Question 20

You are hoping to buy a new boat 3 years from now, and you plan to save $4,200 per year, beginning one year from today.You will deposit your savings in an account that pays 5.2% interest.How much will you have just after you make the 3rd deposit, 3 years from now?

Accepted Answer

A)  $11,973 
B)  $12,603 
C)  $13,267 
D)  $13,930 
E)  $14,626 
A)  $11,973 
B)  $12,603 
C)  $13,267 
D)  $13,930 
E)  $14,626

Exam 4: Time Value of Money

A "growing annuity" is a cash flow stream that grows at a constant rate for a specified number of periods.

You are considering investing in a European bank account that pays a nominal annual rate of 18%, compounded monthly.If you invest $5,000 at the beginning of each month, how many months would it take for your account to grow to $250,000? Round fractional months up.

Suppose you just won the state lottery, and you have a choice between receiving $2,550,000 today or a 20-year annuity of $250,000, with the first payment coming one year from today.What rate of return is built into the annuity? Disregard taxes.

Now that your uncle has decided to retire, he wants to buy an annuity that will provide him with $85,000 of income a year for 25 years, with the first payment coming immediately.The going rate on such annuities is 5.15%.How much would it cost him to buy the annuity today?

Your investment account pays 8.0%, compounded annually.If you invest $5,000 today, how many years will it take for your investment to grow to $9,140.20?

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

Which of the following statements regarding a 20-year (240-month) $225,000, fixed-rate mortgage is CORRECT? (Ignore taxes and transactions costs.)

Cochrane Associate's net sales last year were $525 million.If sales grow at 7.5% per year, how large (in millions) will they be 8 years later?

Suppose United Bank offers to lend you $10,000 for one year at a nominal annual rate of 8.00%, but you must make interest payments at the end of each quarter and then pay off the $10,000 principal amount at the end of the year.What is the effective annual rate on the loan?

Your bank account pays an 8% nominal rate of interest.The interest is compounded quarterly.Which of the following statements is CORRECT?

Suppose a State of North Carolina bond will pay $1,000 ten years from now.If the going interest rate on these 10-year bonds is 5.5%, how much is the bond worth today?

Suppose you deposited $5,000 in a bank account that pays 5.25% with daily compounding based on a 360-day year.How much would be in the account after 8 months, assuming each month has 30 days?

A "growing annuity" is any cash flow stream that grows over time.

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 increase the calculated value of the investment?

Brockman Corporation's earnings per share were $3.50 last year, and its growth rate during the prior 5 years was 9.0% per year.If that growth rate were maintained, how many years would it take for Brockman's EPS to triple?

When a loan is amortized, a relatively low percentage of the payment goes to reduce the outstanding principal in the early years, and the principal repayment's percentage increases in the loan's later years.

Which of the following statements is CORRECT?

You are hoping to buy a new boat 3 years from now, and you plan to save $4,200 per year, beginning one year from today.You will deposit your savings in an account that pays 5.2% interest.How much will you have just after you make the 3rd deposit, 3 years from now?

An Overview of Financial Management and the Financial Environment

Financial Statements, Cash Flow, and Taxes

Analysis of Financial Statements

Bonds, Bond Valuation, and Interest Rates

Risk and Return

Corporate Valuation and Stock Valuation

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

Corporate Valuation and Financial Planning

Corporate Governance

Distributions to Shareholders: Dividends and Repurchases

Capital Structure Decisions

Supply Chains and Working Capital Management

Multinational Financial Management

Public and Private Financing: Initial Offerings, Seasoned Offerings, and Investment Banks

Lease Financing

Hybrid Financing: Preferred Stock, Warrants, and Convertibles

Dynamic Capital Structures and Corporate Valuation

Mergers and Corporate Control

Enterprise Risk Management

Bankruptcy, Reorganization, and Liquidation

Portfolio Theory and Asset Pricing Models

Real Options

Providing and Obtaining Credit

Advanced Issues in Cash Management and Inventory Control

Pension Plan Management

Financial Management in Not-For-Profit Businesses

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