Question 1

The rate used to ﬁnd the present value of a future payment is called the:

Accepted Answer

A)  Simple rate. 
B)  Discount rate. 
C)  Compound rate. 
D)  Future value rate. 
E)  Loan rate. 
A)  Simple rate. 
B)  Discount rate. 
C)  Compound rate. 
D)  Future value rate. 
E)  Loan rate.

Question 2

Five friends all open investment accounts today. Which one will withdraw the largest amount of money from their account assuming that they each withdraw their funds at the end of their initial
Investment period?

Accepted Answer

A)  John, who invests $1,000 for eight years at 6% simple interest. 
B)  Terry, who invests $1,000 for four years at 9% with interest compounded annually. 
C)  Alicia, who invests $800 for ten years at 11% with interest compounded annually. 
D)  Kristi, who invests $1,200 for six years at 8% simple interest. 
E)  Roger, who invests $900 for nine years at 9% with interest compounded annually. 
A)  John, who invests $1,000 for eight years at 6% simple interest. 
B)  Terry, who invests $1,000 for four years at 9% with interest compounded annually. 
C)  Alicia, who invests $800 for ten years at 11% with interest compounded annually. 
D)  Kristi, who invests $1,200 for six years at 8% simple interest. 
E)  Roger, who invests $900 for nine years at 9% with interest compounded annually.

Question 3

You would like to give your daughter $40,000 towards her college education thirteen years from now. How much money must you set aside today for this purpose if you can earn 6.3% on your
Funds?

Accepted Answer

A)  $17,750.00 
B)  $17,989.28 
C)  $18,077.05 
D)  $18,213.69 
E)  $18,395.00 
A)  $17,750.00 
B)  $17,989.28 
C)  $18,077.05 
D)  $18,213.69 
E)  $18,395.00

Question 4

Stephen invests $2,500 in an account that pays 6% simple interest. How much money will Stephen have at the end of three years?

Accepted Answer

A)  $2,650 
B)  $2,809 
C)  $2,950 
D)  $2,978 
E)  $3,000 
A)  $2,650 
B)  $2,809 
C)  $2,950 
D)  $2,978 
E)  $3,000

Question 5

Chia Burgers began operations by opening 115 restaurants in Western Canada at the end of its ﬁrst year of operations. By the end of year 2, an additional 5 restaurants were opened. By the end of
Year 3, there were 130 restaurants operational. At the end of year 5, there were 138 total
Restaurants.
If, over the next ﬁve years, eating establishments are expected to grow at the annual growth rate as
They did during years 1 to 5, forecast the number of eating establishments at the end of year 10.

Accepted Answer

A)  172 
B)  198 
C)  202 
D)  223 
E)  225 
A)  172 
B)  198 
C)  202 
D)  223 
E)  225

Question 6

Today you earn a salary of $28,500. What will be your annual salary ﬁfteen years from now if you earn annual raises of 3.5%?

Accepted Answer

A)  $47,035.35 
B)  $47,522.89 
C)  $47,747.44 
D)  $48,091.91 
E)  $48,201.60 
A)  $47,035.35 
B)  $47,522.89 
C)  $47,747.44 
D)  $48,091.91 
E)  $48,201.60

Question 7

Neal wants to borrow $2,500 and has received the offers from his local banks. Which offer should Neal accept if he wants to repay the loan in one single payment two years from now?

Accepted Answer

A)  Bank A, which offers a simple rate of 4%. 
B)  Bank B, which offers a simple rate of 5%. 
C)  Bank C, which offers a rate of 4% compounded annually. 
D)  Bank D, which offers a rate of 5% compounded annually. 
E)  Bank E, which offers a rate of 5% compounded monthly. 
A)  Bank A, which offers a simple rate of 4%. 
B)  Bank B, which offers a simple rate of 5%. 
C)  Bank C, which offers a rate of 4% compounded annually. 
D)  Bank D, which offers a rate of 5% compounded annually. 
E)  Bank E, which offers a rate of 5% compounded monthly.

Question 8

Present value is the value today of future cash ﬂows discounted at the appropriate discount rate.

Accepted Answer

A) True 
 B)False

Question 9

An investor is considering depositing $10,000 in an account earning 3% compounded monthly for
the next two years. Afterwards, he will take this amount and contribute $500 monthly for the next
three years at a rate of 5% compounded annually. Finally, over the next three years, he will
withdraw $500 annually at a rate of 4.5% compounded semi-annually. Determine the future value at
the end of this time period.

Accepted Answer

The future

Question 10

An investor deposited $10,500 in an account. At the end of year four, the account had accumulated $5,728.88. Over the ﬁrst four years, the account earned ________ compounded annually.

Accepted Answer

A)  11.5% 
B)  12.8% 
C)  14.6% 
D)  15.6% 
E)  23.1% 
A)  11.5% 
B)  12.8% 
C)  14.6% 
D)  15.6% 
E)  23.1%

Question 11

Alpha, Inc. is saving money to build a new factory. Six years ago they set aside $250,000 for this purpose. Today, that account is worth $306,958. What rate of interest is Alpha earning on this
Money?

Accepted Answer

A)  3.43% 
B)  3.45% 
C)  3.48% 
D)  3.52% 
E)  3.55% 
A)  3.43% 
B)  3.45% 
C)  3.48% 
D)  3.52% 
E)  3.55%

Question 12

Martha is going to receive $6,000 in two years from Tom. She will receive an additional $4,000 in three years from Tom. She earns 7.15% on her investments. How much is this money from Tom worth
To Martha today?

Accepted Answer

A)  $7,893.46 
B)  $8,477.47 
C)  $8,891.74 
D)  $9,225.97 
E)  $9,251.50 
A)  $7,893.46 
B)  $8,477.47 
C)  $8,891.74 
D)  $9,225.97 
E)  $9,251.50

Question 13

You deposit $3,000 in a retirement account today at 5.5% interest. How much more money will you have if you leave the money invested for forty-ﬁve years rather than forty years?

Accepted Answer

A)  $7,714.91 
B)  $7,799.08 
C)  $7839.74 
D)  $7,846.52 
E)  $7,858.19 
A)  $7,714.91 
B)  $7,799.08 
C)  $7839.74 
D)  $7,846.52 
E)  $7,858.19

Question 14

Present value is deﬁned as the:

Accepted Answer

A)  Amount of money invested each time period for a stated number of periods. 
B)  Summation of the cash ﬂows received within a speciﬁed period of time. 
C)  Value of future cash ﬂows in today's dollars given a speciﬁc discount rate. 
D)  Compounded value of a principal amount given a speciﬁc rate of interest. 
E)  Value of an investment given simple interest for a speciﬁc period of time. 
A)  Amount of money invested each time period for a stated number of periods. 
B)  Summation of the cash ﬂows received within a speciﬁed period of time. 
C)  Value of future cash ﬂows in today's dollars given a speciﬁc discount rate. 
D)  Compounded value of a principal amount given a speciﬁc rate of interest. 
E)  Value of an investment given simple interest for a speciﬁc period of time.

Question 15

The longer the time period, the higher the present value.

Accepted Answer

A) True 
 B)False

Question 16

You are considering two lottery payment streams. Choice A pays $1,000 today and choice B pays
$1,750 at the end of ﬁve years from now. Using a discount rate of 5%, based on present values,
which would you choose? Using the same discount rate of 5%, based on future values, which would
you choose? What do your results suggest as a general rule for approaching such problems? (Make
your choices based purely on the time value of money.)

Accepted Answer

PV of A = $1,000; PV of B = $1,371; FV o

Question 17

Susie and Tim are twins. Susie invests $5,000 at age 20 and earns 5% compound interest. Tim
invests $10,000 at age 40 and earns 5% compound interest. No matter how long they live, Tim will
never have as much money as Susie. Explain why.

Accepted Answer

By age 40, Susie's funds had grown to $1

Question 18

Provide a deﬁnition of discount rate.

Accepted Answer

The rate used to cal

Question 19

You own a classic automobile that is currently valued at $39,500. If the value increases by 6% annually, how much will the auto be worth ten years from now?

Accepted Answer

A)  $64,341.34 
B)  $44,734.42 
C)  $69,843.06 
D)  $70,738.48 
E)  $74,146.93 
A)  $64,341.34 
B)  $44,734.42 
C)  $69,843.06 
D)  $70,738.48 
E)  $74,146.93

Question 20

Your goal is to build your ﬁrst home seven years from now. The home that you desire currently costs $215,900. New home prices are increasing by 4.2% annually. If home prices continue rising at
That pace, how much will your home cost when you are ready to build seven years from now?

Accepted Answer

A)  $281,113.21 
B)  $284,109.67 
C)  $287,956.36 
D)  $292,001.06 
E)  $295,474.06 
A)  $281,113.21 
B)  $284,109.67 
C)  $287,956.36 
D)  $292,001.06 
E)  $295,474.06

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

The rate used to ﬁnd the present value of a future payment is called the:

Five friends all open investment accounts today. Which one will withdraw the largest amount of money from their account assuming that they each withdraw their funds at the end of their initial Investment period?

You would like to give your daughter $40,000 towards her college education thirteen years from now. How much money must you set aside today for this purpose if you can earn 6.3% on your Funds?

Stephen invests $2,500 in an account that pays 6% simple interest. How much money will Stephen have at the end of three years?

Today you earn a salary of $28,500. What will be your annual salary ﬁfteen years from now if you earn annual raises of 3.5%?

Neal wants to borrow $2,500 and has received the offers from his local banks. Which offer should Neal accept if he wants to repay the loan in one single payment two years from now?

Present value is the value today of future cash ﬂows discounted at the appropriate discount rate.

An investor deposited $10,500 in an account. At the end of year four, the account had accumulated $5,728.88. Over the ﬁrst four years, the account earned ________ compounded annually.

Alpha, Inc. is saving money to build a new factory. Six years ago they set aside $250,000 for this purpose. Today, that account is worth $306,958. What rate of interest is Alpha earning on this Money?

Martha is going to receive $6,000 in two years from Tom. She will receive an additional $4,000 in three years from Tom. She earns 7.15% on her investments. How much is this money from Tom worth To Martha today?

You deposit $3,000 in a retirement account today at 5.5% interest. How much more money will you have if you leave the money invested for forty-ﬁve years rather than forty years?

Present value is deﬁned as the:

The longer the time period, the higher the present value.

Susie and Tim are twins. Susie invests $5,000 at age 20 and earns 5% compound interest. Tim invests $10,000 at age 40 and earns 5% compound interest. No matter how long they live, Tim will never have as much money as Susie. Explain why.

Provide a deﬁnition of discount rate.

You own a classic automobile that is currently valued at $39,500. If the value increases by 6% annually, how much will the auto be worth ten years from now?

Your goal is to build your ﬁrst home seven years from now. The home that you desire currently costs $215,900. New home prices are increasing by 4.2% annually. If home prices continue rising at That pace, how much will your home cost when you are ready to build seven years from now?

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