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

Your uncle is about to retire, and he wants to buy an annuity that will provide him with $75,000 of income a year for 20 years, with the first payment coming immediately. The going rate on such annuities is 5.25%. How much would it cost him to buy the annuity today?

Accepted Answer

A)  $825,835 
B)  $869,300 
C)  $915,052 
D)  $963,213 
E)  $1,011,374 
A)  $825,835 
B)  $869,300 
C)  $915,052 
D)  $963,213 
E)  $1,011,374

Question 3

What annual payment must you receive in order to earn a 6.5% rate of return on a perpetuity that has a cost of $1,250?

Accepted Answer

A)  $77.19 
B)  $81.25 
C)  $85.31 
D)  $89.58 
E)  $94.06 
A)  $77.19 
B)  $81.25 
C)  $85.31 
D)  $89.58 
E)  $94.06

Question 4

Starting to invest early for retirement reduces the benefits of compound interest.

Accepted Answer

A) True 
 B)False

Question 5

Riverside Bank offers to lend you $50,000 at a nominal rate of 6.5%, compounded monthly. The loan (principal plus interest) must be repaid at the end of the year. Midwest Bank also offers to lend you the $50,000, but it will charge an annual rate of 7.0%, with no interest due until the end of the year. How much higher or lower is the effective annual rate charged by Midwest versus the rate charged by Riverside?

Accepted Answer

A)  0.52% 
B)  0.44% 
C)  0.36% 
D)  0.30% 
E)  0.24% 
A)  0.52% 
B)  0.44% 
C)  0.36% 
D)  0.30% 
E)  0.24%

Question 6

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 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. 
B)  The discount rate decreases. 
C)  The riskiness of the investment's cash flows increases. 
D)  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. 
E)  The discount rate increases. 
A)  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. 
B)  The discount rate decreases. 
C)  The riskiness of the investment's cash flows increases. 
D)  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. 
E)  The discount rate increases.

Question 7

Suppose a State of New York 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 8

Wendy has $5,000 invested in a bank that pays 3.8% annually. How long will it take for her funds to triple?

Accepted Answer

A)  23.99 
B)  25.26 
C)  26.58 
D)  27.98 
E)  29.46 
A)  23.99 
B)  25.26 
C)  26.58 
D)  27.98 
E)  29.46

Question 9

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

Accepted Answer

A) True 
 B)False

Question 10

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 11

If a bank compounds savings accounts quarterly, the nominal rate will exceed the effective annual rate.

Accepted Answer

A) True 
 B)False

Question 12

Your girlfriend just won the Florida lottery. She has the choice of $15,000,000 today or a 20-year annuity of $1,050,000, with the first payment coming one year from today. What rate of return is built into the annuity?

Accepted Answer

A)  3.44% 
B)  3.79% 
C)  4.17% 
D)  4.58% 
E)  5.04% 
A)  3.44% 
B)  3.79% 
C)  4.17% 
D)  4.58% 
E)  5.04%

Question 13

What's the present value of a perpetuity that pays $250 per year if the appropriate interest rate is 5%?

Accepted Answer

A)  $4,750 
B)  $5,000 
C)  $5,250 
D)  $5,513 
E)  $5,788 
A)  $4,750 
B)  $5,000 
C)  $5,250 
D)  $5,513 
E)  $5,788

Question 14

At a rate of 6.5%, what is the future value of the following cash flow stream?

Accepted Answer

A)  $526.01 
B)  $553.69 
C)  $582.83 
D)  $613.51 
E)  $645.80 
A)  $526.01 
B)  $553.69 
C)  $582.83 
D)  $613.51 
E)  $645.80

Question 15

Assume that you own an annuity that will pay you $15,000 per year for 12 years, with the first payment being made today. You need money today to start a new business, and your uncle offers to give you
$120,000 for the annuity. If you sell it, what rate of return would your uncle earn on his investment?

Accepted Answer

A)  6.85% 
B)  7.21% 
C)  7.59% 
D)  7.99% 
E)  8.41% 
A)  6.85% 
B)  7.21% 
C)  7.59% 
D)  7.99% 
E)  8.41%

Question 16

Suppose Sally Smith plans to invest $1,000. She can earn an effective annual rate of 5% on Security A, while Security B has an effective annual rate of 12%. After 11 years, the compounded value of Security B should be more than twice the compounded value of Security A. (Ignore risk, and assume that compounding occurs annually.)

Accepted Answer

A) True 
 B)False

Question 17

You plan to borrow $35,000 at a 7.5% annual interest rate. The terms require you to amortize the loan with 7 equal end-of-year payments. How much interest would you be paying in Year 2?

Accepted Answer

A)  $1,994.49 
B)  $2,099.46 
C)  $2,209.96 
D)  $2,326.27 
E)  $2,442.59 
A)  $1,994.49 
B)  $2,099.46 
C)  $2,209.96 
D)  $2,326.27 
E)  $2,442.59

Question 18

Your father is about to retire, and 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 19

What is the PV of an annuity due with 5 payments of $2,500 at an interest rate of 5.5%?

Accepted Answer

A)  $11,262.88 
B)  $11,826.02 
C)  $12,417.32 
D)  $13,038.19 
E)  $13,690.10 
A)  $11,262.88 
B)  $11,826.02 
C)  $12,417.32 
D)  $13,038.19 
E)  $13,690.10

Question 20

Suppose you inherited $275,000 and invested it at 8.25% per year. How much could you withdraw at the beginning of each of the next 20 years?

Accepted Answer

A)  $22,598.63 
B)  $23,788.03 
C)  $25,040.03 
D)  $26,357.92 
E)  $27,675.82 
A)  $22,598.63 
B)  $23,788.03 
C)  $25,040.03 
D)  $26,357.92 
E)  $27,675.82

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.

Your uncle is about to retire, and he wants to buy an annuity that will provide him with $75,000 of income a year for 20 years, with the first payment coming immediately. The going rate on such annuities is 5.25%. How much would it cost him to buy the annuity today?

What annual payment must you receive in order to earn a 6.5% rate of return on a perpetuity that has a cost of $1,250?

Starting to invest early for retirement reduces the benefits of compound interest.

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?

Suppose a State of New York 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?

Wendy has $5,000 invested in a bank that pays 3.8% annually. How long will it take for her funds to triple?

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

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?

If a bank compounds savings accounts quarterly, the nominal rate will exceed the effective annual rate.

Your girlfriend just won the Florida lottery. She has the choice of $15,000,000 today or a 20-year annuity of $1,050,000, with the first payment coming one year from today. What rate of return is built into the annuity?

What's the present value of a perpetuity that pays $250 per year if the appropriate interest rate is 5%?

At a rate of 6.5%, what is the future value of the following cash flow stream?

You plan to borrow $35,000 at a 7.5% annual interest rate. The terms require you to amortize the loan with 7 equal end-of-year payments. How much interest would you be paying in Year 2?

Your father is about to retire, and 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?

What is the PV of an annuity due with 5 payments of $2,500 at an interest rate of 5.5%?

Suppose you inherited $275,000 and invested it at 8.25% per year. How much could you withdraw at the beginning of each of the next 20 years?

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, 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

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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