Question 1

Provide a deﬁnition of simple interest.

Accepted Answer

Interest earned only

Question 2

The Blackwell Co. expects to receive $135,000 from an insurance settlement four years from now. If the company can earn 11% on its investments, what is the value of the insurance settlement worth
Today?

Accepted Answer

A)  $85,368.94 
B)  $87,693.43 
C)  $88,928.68 
D)  $130,161.39 
E)  $140,018.48 
A)  $85,368.94 
B)  $87,693.43 
C)  $88,928.68 
D)  $130,161.39 
E)  $140,018.48

Question 3

Some ﬁnancial advisors recommend you increase the amount of federal income taxes withheld
from your pay cheque each month so that you will get a larger refund come April. That is, you take
home less today but get a bigger lump sum when you get your refund. Based on your knowledge of
the time value of money, what do you think of this idea? Explain.

Accepted Answer

Some students may slip in a discussion a

Question 4

At an interest rate of 10% and using the Rule of 72, how long will it take to double the value of a
lump sum invested today? How long will it take after that until the account grows to four times the
initial investment? Given the power of compounding, shouldn't it take less time for the money to
double the second time?

Accepted Answer

It will take 7.2 years to double the ini

Question 5

As the discount rate increases, the future value of $500 to be received four years from now will
decrease:

Accepted Answer

A) True 
 B)False

Question 6

What is the difference in future value if $40,000 is invested at 5% over twenty years, with one
option compounding interest annually, while the other is based on monthly compounding?

Accepted Answer

Annual compounding provides a

Question 7

State the future value formula and explain the effect that time has on the future value of an
investment.

Accepted Answer

FV = PV(1 + r)t
Time is the exponential

Question 8

Your grandmother invested one lump sum 17 years ago at 4.25% interest. Today, she gave you the proceeds of that investment which totaled $5,539.92. How much did your grandmother originally
Invest?

Accepted Answer

A)  $2,700.00 
B)  $2,730.30 
C)  $2,750.00 
D)  $2,768.40 
E)  $2,774.90 
A)  $2,700.00 
B)  $2,730.30 
C)  $2,750.00 
D)  $2,768.40 
E)  $2,774.90

Question 9

What is the rate needed (compounded annually) for $95,000 to mature to $250,000 in 25 years?

Accepted Answer

The required rate of

Question 10

The discounted value of money is called the:

Accepted Answer

A)  Compound value. 
B)  Simple value. 
C)  Future value. 
D)  Complex value. 
E)  Present value. 
A)  Compound value. 
B)  Simple value. 
C)  Future value. 
D)  Complex value. 
E)  Present value.

Question 11

How much would you have to invest today at 8% compounded annually to have $25,000 available for the purchase of a car four years from now?

Accepted Answer

A)  $18,267.26 
B)  $18,375.75 
C)  $19,147.25 
D)  $21,370.10 
E)  $22,149.57 
A)  $18,267.26 
B)  $18,375.75 
C)  $19,147.25 
D)  $21,370.10 
E)  $22,149.57

Question 12

If the rate at which you can invest is 0%, the value today of $1 to be received in the future is less
than $1.

Accepted Answer

A) True 
 B)False

Question 13

All County Insurance, Inc. promises to pay Ted $1 million on his 65th birthday in return for a one-time payment of $75,000 today. (Ted just turned 25) At what rate of interest would Ted be indifferent
Between accepting the company's offer and investing the premium on his own?

Accepted Answer

A)  2.4% 
B)  5.5% 
C)  6.1% 
D)  6.7% 
E)  7.2% 
A)  2.4% 
B)  5.5% 
C)  6.1% 
D)  6.7% 
E)  7.2%

Question 14

Jennifer invested $2,000 in an account that pays 3% simple interest. How much more could she have earned over a six-year period if the interest had compounded annually?

Accepted Answer

A)  $28.10 
B)  $29.18 
C)  $31.50 
D)  $33.33 
E)  $34.67 
A)  $28.10 
B)  $29.18 
C)  $31.50 
D)  $33.33 
E)  $34.67

Question 15

In which year did the account earn its highest annually compounded return?

Accepted Answer

A)  Year 1 at 10% 
B)  Year 2 at 5.45% 
C)  Year 3 at 13.8% 
D)  Year 4 at 17.0% 
E)  Year 5 at 15.6% 
A)  Year 1 at 10% 
B)  Year 2 at 5.45% 
C)  Year 3 at 13.8% 
D)  Year 4 at 17.0% 
E)  Year 5 at 15.6%

Question 16

All else being the same, which of the following statements is correct?

Accepted Answer

A)  Present values increase as the discount rate increases I only. 
B)  Present values decrease as the discount rate decreases. 
C)  Present values increase the further away in time the future value. 
D)  Present values are always smaller than future values when both r and t are positive. 
E)  Present values are always smaller than future values when r is negative and t positive. 
A)  Present values increase as the discount rate increases I only. 
B)  Present values decrease as the discount rate decreases. 
C)  Present values increase the further away in time the future value. 
D)  Present values are always smaller than future values when both r and t are positive. 
E)  Present values are always smaller than future values when r is negative and t positive.

Question 17

Alex and Courtney are each investing $1,200 today in a savings account. Alex will earn 4% interest compounded annually. Courtney will earn 4% simple interest. After ﬁve years Alex will have ____
More than Courtney.

Accepted Answer

A)  $19.98 
B)  $20.13 
C)  $20.17 
D)  $20.21 
E)  $20.28 
A)  $19.98 
B)  $20.13 
C)  $20.17 
D)  $20.21 
E)  $20.28

Question 18

Koji invested $3,300 at 7.75% interest. After a period of time he withdrew $9,383.31. How long did Koji have his money invested?

Accepted Answer

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

Question 19

You will be receiving $5,000 from your family as a graduation present. You have decided to save this money for your retirement. You plan to retire thirty-ﬁve years after graduating. How much
Additional money will you have at that time if you can earn an average of 8.5% on your investment
Instead of just 8%?

Accepted Answer

A)  $12,971.49 
B)  $13,008.47 
C)  $13,123.93 
D)  $13,234.44 
E)  $13,309.85 
A)  $12,971.49 
B)  $13,008.47 
C)  $13,123.93 
D)  $13,234.44 
E)  $13,309.85

Question 20

Cooper invests $6,500 in a savings account at his local bank. The bank pays 2.75% simple interest. Cooper does not make any additional withdrawals or deposits to this account. How much will his
Account be worth after 12 years?

Accepted Answer

A)  $2,145 
B)  $2,655 
C)  $6,679 
D)  $8,645 
E)  $9,001 
A)  $2,145 
B)  $2,655 
C)  $6,679 
D)  $8,645 
E)  $9,001

Exam 5: Introduction to Valuation: the Time Value of Money

Provide a deﬁnition of simple interest.

The Blackwell Co. expects to receive $135,000 from an insurance settlement four years from now. If the company can earn 11% on its investments, what is the value of the insurance settlement worth Today?

As the discount rate increases, the future value of $500 to be received four years from now will decrease:

What is the difference in future value if $40,000 is invested at 5% over twenty years, with one option compounding interest annually, while the other is based on monthly compounding?

State the future value formula and explain the effect that time has on the future value of an investment.

Your grandmother invested one lump sum 17 years ago at 4.25% interest. Today, she gave you the proceeds of that investment which totaled $5,539.92. How much did your grandmother originally Invest?

What is the rate needed (compounded annually) for $95,000 to mature to $250,000 in 25 years?

The discounted value of money is called the:

How much would you have to invest today at 8% compounded annually to have $25,000 available for the purchase of a car four years from now?

If the rate at which you can invest is 0%, the value today of $1 to be received in the future is less than $1.

All County Insurance, Inc. promises to pay Ted $1 million on his 65th birthday in return for a one-time payment of $75,000 today. (Ted just turned 25) At what rate of interest would Ted be indifferent Between accepting the company's offer and investing the premium on his own?

Jennifer invested $2,000 in an account that pays 3% simple interest. How much more could she have earned over a six-year period if the interest had compounded annually?

In which year did the account earn its highest annually compounded return?

All else being the same, which of the following statements is correct?

Alex and Courtney are each investing $1,200 today in a savings account. Alex will earn 4% interest compounded annually. Courtney will earn 4% simple interest. After ﬁve years Alex will have ____ More than Courtney.

Koji invested $3,300 at 7.75% interest. After a period of time he withdrew $9,383.31. How long did Koji have his money invested?

Cooper invests $6,500 in a savings account at his local bank. The bank pays 2.75% simple interest. Cooper does not make any additional withdrawals or deposits to this account. How much will his Account be worth after 12 years?

Introduction to Corporate Finance

Financial Statements, Taxes, and Cash Flow

Working With Financial Statements

Long-Term Financial Planning and Growth

Discounted Cash Flow Valuation

Interest Rates and Bond Valuation

Stock Valuation

Net Present Value and Other Investment Criteria

Making Capital Investment Decisions

Project Analysis and Evaluation

Some Lessons From Capital Market History

Return, Risk, and the Security Market Line

Cost of Capital

Raising Capital

Financial Leverage and Capital Structure Policy

Dividends and Payout Policy

Short-Term Finance and Planning

Cash and Liquidity Management

Credit and Inventory Management

International Corporate Finance

Behavioral Finance: Implications for Financial Management

Enterprise Risk Management

Options and Corporate Finance

Option Valuation

Mergers and Acquisitions

Filters