Question 1

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 2

You would like to have enough money saved to receive $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 start one year from the date of your retirement. The interest rate is 8%)?

Accepted Answer

A)  $7,500,000 
B)  $750,000 
C)  $1,000,000 
D)  None of the above 
A)  $7,500,000 
B)  $750,000 
C)  $1,000,000 
D)  None of the above

Question 3

"Accept investments that have positive net present values" is called the net present value rule.

Accepted Answer

A) True 
 B)False

Question 4

Present Value of $100,000 that is, expected, to be received at the end of one year at a discount rate of 25% per year is:

Accepted Answer

A)  $80,000 
B)  $125,000 
C)  $100,000 
D)  None of the above 
A)  $80,000 
B)  $125,000 
C)  $100,000 
D)  None of the above

Question 5

An initial investment of $400,000 will produce an end of year cash flow of $480,000. What is the NPV of the project at a discount rate of 20%?

Accepted Answer

A)  $176,000 
B)  $80,000 
C)  $0 (zero) 
D)  None of the above 
A)  $176,000 
B)  $80,000 
C)  $0 (zero) 
D)  None of the above

Question 6

Which of the following is generally considered an example of a perpetuity:

Accepted Answer

A)  Interest payments on a 10-year bond 
B)  Interest payments on a 30-year bond 
C)  Consols 
D)  None of the above 
A)  Interest payments on a 10-year bond 
B)  Interest payments on a 30-year bond 
C)  Consols 
D)  None of the above

Question 7

John House has taken a 20-year, $250,000 mortgage on his house at an interest rate of 6% per year. What is the value of the mortgage after the payment of the fifth annual installment?

Accepted Answer

A)  $128,958.41 
B)  $211,689.53 
C)  $141,019.50 
D)  None of the above 
A)  $128,958.41 
B)  $211,689.53 
C)  $141,019.50 
D)  None of the above

Question 8

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

Accepted Answer

A) True 
 B)False

Question 9

If the present value of $1.00 received n years from today at an interest rate of r is 0.621, then what is the future value of $1.00 invested today at an interest rate of r% for n years?

Accepted Answer

A)  $1.00 
B)  $1.61 
C)  $1.621 
D)  Not enough information to solve the problem 
A)  $1.00 
B)  $1.61 
C)  $1.621 
D)  Not enough information to solve the problem

Question 10

John House has taken a $250,000 mortgage on his house at an interest rate of 6% per year. If the mortgage calls for twenty equal annual payments, what is the amount of each payment?

Accepted Answer

A)  $21,796.14 
B)  $10,500.00 
C)  $16,882.43 
D)  None of the above 
A)  $21,796.14 
B)  $10,500.00 
C)  $16,882.43 
D)  None of the above

Question 11

If the present value annuity factor for 10 years at 10% interest rate is 6.1446, what is the present value annuity factor for an equivalent annuity due?

Accepted Answer

A)  6.1446 
B)  7.38 
C)  6.759 
D)  None of the above 
A)  6.1446 
B)  7.38 
C)  6.759 
D)  None of the above

Question 12

The managers of a firm can maximize stockholder wealth by:

Accepted Answer

A)  Taking all projects with positive NPVs 
B)  Taking all projects with NPVs greater than the cost of investment 
C)  Taking all projects with NPVs greater than present value of cash flow 
D)  All of the above 
A)  Taking all projects with positive NPVs 
B)  Taking all projects with NPVs greater than the cost of investment 
C)  Taking all projects with NPVs greater than present value of cash flow 
D)  All of the above

Question 13

Briefly explain the concept of risk.

Accepted Answer

If the future cash flows from an investm

Question 14

What is the net present value (NPV) of the following cash flows at a discount rate of 9%?
$\begin{array}{cccc}
 \underline{ \text { t=0} } &  \underline{ \text { t=1} } & \underline{ \text { t=2} } & \underline{ \text { t=3} }  \
-250,000&100,000&150,000&200,000
\end{array}$

Accepted Answer

A)  $122,431.81 
B)  $200,000 
C)  $155,950.68 
D)  None of the above 
A)  $122,431.81 
B)  $200,000 
C)  $155,950.68 
D)  None of the above

Question 15

You would like to have enough money saved to receive a $50,000 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 8%)?

Accepted Answer

A)  $1,000,000 
B)  $675,000 
C)  $625,000 
D)  None of the above 
A)  $1,000,000 
B)  $675,000 
C)  $625,000 
D)  None of the above

Question 16

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 17

State the "rate of return rule."

Accepted Answer

Invest as long as the rate of

Question 18

If the five-year present value annuity factor is 3.60478 and four-year present value annuity factor is 3.03735, what is the present value at the $1 received at the end of five years?

Accepted Answer

A)  $0.63552 
B)  $1.76233 
C)  $0.56743 
D)  None of the above 
A)  $0.63552 
B)  $1.76233 
C)  $0.56743 
D)  None of the above

Question 19

In the case of a growing perpetuity, the present value of the cash flow is given by: [C1/(r - g)] where r > g.

Accepted Answer

A) True 
 B)False

Question 20

If the three-year present value annuity factor is 2.673 and two-year present value annuity factor is 1.833, what is the present value of $1 received at the end of the 3 years?

Accepted Answer

A)  $1.1905 
B)  $0.84 
C)  $0.89 
D)  None of the above 
A)  $1.1905 
B)  $0.84 
C)  $0.89 
D)  None of the above

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

"Accept investments that have positive net present values" is called the net present value rule.

Present Value of $100,000 that is, expected, to be received at the end of one year at a discount rate of 25% per year is:

An initial investment of $400,000 will produce an end of year cash flow of $480,000. What is the NPV of the project at a discount rate of 20%?

Which of the following is generally considered an example of a perpetuity:

John House has taken a 20-year, $250,000 mortgage on his house at an interest rate of 6% per year. What is the value of the mortgage after the payment of the fifth annual installment?

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

If the present value of $1.00 received n years from today at an interest rate of r is 0.621, then what is the future value of $1.00 invested today at an interest rate of r% for n years?

John House has taken a $250,000 mortgage on his house at an interest rate of 6% per year. If the mortgage calls for twenty equal annual payments, what is the amount of each payment?

If the present value annuity factor for 10 years at 10% interest rate is 6.1446, what is the present value annuity factor for an equivalent annuity due?

The managers of a firm can maximize stockholder wealth by:

Briefly explain the concept of risk.

What is the net present value (NPV) of the following cash flows at a discount rate of 9%? -250,000 100,000 150,000 200,000

A perpetuity is defined as:

State the "rate of return rule."

If the five-year present value annuity factor is 3.60478 and four-year present value annuity factor is 3.03735, what is the present value at the $1 received at the end of five years?

In the case of a growing perpetuity, the present value of the cash flow is given by: [C1/(r - g)] where r > g.

If the three-year present value annuity factor is 2.673 and two-year present value annuity factor is 1.833, what is the present value of $1 received at the end of the 3 years?

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

Efficient Markets and Behavioral Finance

Payout Policy

Does Debt Policy Matter

How Much Should a Corporation Borrow

Financing and Valuation

Understanding Options

Valuing Options

Financial Analysis

Financial Planning

Filters

Exam 2: How to Calculate Present Values

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

"Accept investments that have positive net present values" is called the net present value rule.

Present Value of $100,000 that is, expected, to be received at the end of one year at a discount rate of 25% per year is:

An initial investment of $400,000 will produce an end of year cash flow of $480,000. What is the NPV of the project at a discount rate of 20%?

Which of the following is generally considered an example of a perpetuity:

John House has taken a 20-year, $250,000 mortgage on his house at an interest rate of 6% per year. What is the value of the mortgage after the payment of the fifth annual installment?

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

If the present value of $1.00 received n years from today at an interest rate of r is 0.621, then what is the future value of $1.00 invested today at an interest rate of r% for n years?

John House has taken a $250,000 mortgage on his house at an interest rate of 6% per year. If the mortgage calls for twenty equal annual payments, what is the amount of each payment?

If the present value annuity factor for 10 years at 10% interest rate is 6.1446, what is the present value annuity factor for an equivalent annuity due?

The managers of a firm can maximize stockholder wealth by:

Briefly explain the concept of risk.

What is the net present value (NPV) of the following cash flows at a discount rate of 9%? -250,000 100,000 150,000 200,000

A perpetuity is defined as:

State the "rate of return rule."

If the five-year present value annuity factor is 3.60478 and four-year present value annuity factor is 3.03735, what is the present value at the $1 received at the end of five years?

In the case of a growing perpetuity, the present value of the cash flow is given by: [C1/(r - g)] where r > g.

If the three-year present value annuity factor is 2.673 and two-year present value annuity factor is 1.833, what is the present value of $1 received at the end of the 3 years?

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

Efficient Markets and Behavioral Finance

Payout Policy

Does Debt Policy Matter

How Much Should a Corporation Borrow

Financing and Valuation

Understanding Options

Valuing Options

Financial Analysis

Financial Planning

Filters