Question 1

The time value of money concept can be defined as:

Accepted Answer

A)  the time in your life when you receive an inheritance. 
B)  the relationship between money spent versus money received. 
C)  the relationship between a dollar to be received in the future and a dollar today. 
D)  the relationship of interest rate stated and amount paid. 
A)  the time in your life when you receive an inheritance. 
B)  the relationship between money spent versus money received. 
C)  the relationship between a dollar to be received in the future and a dollar today. 
D)  the relationship of interest rate stated and amount paid. C

Question 2

An annuity:

Accepted Answer

A)  is a debt instrument that pays no interest. 
B)  is a stream of payments that varies with current market interest. 
C)  is a series of equal payments through time. 
D)  has no value. 
A)  is a debt instrument that pays no interest. 
B)  is a stream of payments that varies with current market interest. 
C)  is a series of equal payments through time. 
D)  has no value. C

Question 3

The interest rate charged per period multiplied by the number of periods per year is called the _____ rate.

Accepted Answer

A)  effective annual 
B)  annual percentage 
C)  periodic interest 
D)  compound interest 
A)  effective annual 
B)  annual percentage 
C)  periodic interest 
D)  compound interest B

Question 4

A "little seven" accounting firm offers to pay you a year-end bonus of $5,000 for 3 years if you will accept employment with them and stay for the entire 3-year period. Which of the following amounts is closest to the present value of the bonus if the interest rate is 10%?

Accepted Answer

A)  $5,000. 
B)  $11,270. 
C)  $12,434. 
D)  $15,000. 
E)  $31,576. 
A)  $5,000. 
B)  $11,270. 
C)  $12,434. 
D)  $15,000. 
E)  $31,576.

Question 5

Find the present value of $5325.00 to be received in one period if the rate is 6.50%.

Accepted Answer

A)  $5,000.00 
B)  $5,071.43 
C)  $5,671.13 
D)  $5,591.25 
A)  $5,000.00 
B)  $5,071.43 
C)  $5,671.13 
D)  $5,591.25

Question 6

The Ajax Co. just decided to save $1,500 a month for the next five years as a safety net for recessionary periods. The money will be set aside in a separate savings account which pays 3.25% interest compounded monthly. It deposits the first $1,500 today. If the company had wanted to deposit an equivalent lump sum today, how much would it have had to deposit?

Accepted Answer

A)  $82,964.59 
B)  $83,189.29 
C)  $83,428.87 
D)  $83,687.23 
E)  $84,998.01 
A)  $82,964.59 
B)  $83,189.29 
C)  $83,428.87 
D)  $83,687.23 
E)  $84,998.01

Question 7

The equation [Ct/(1 + r)t] provides:

Accepted Answer

A)  the compound value of a series of payments with a single interest rate. 
B)  the compound value of a series of payments with a series of interest rates. 
C)  the compound value of a single payment. 
D)  the present value of a series of payments with a single interest rate. 
E)  the present value of a single payment. 
A)  the compound value of a series of payments with a single interest rate. 
B)  the compound value of a series of payments with a series of interest rates. 
C)  the compound value of a single payment. 
D)  the present value of a series of payments with a single interest rate. 
E)  the present value of a single payment.

Question 8

Tina is able to pay $160 a month for five years for a car. If the interest rate is 4.9%, how much can Tina afford to borrow to buy a car?

Accepted Answer

A)  $6,961.36 
B)  $8,499.13 
C)  $8,533.84 
D)  $8,686.82 
E)  $9,588.05 
A)  $6,961.36 
B)  $8,499.13 
C)  $8,533.84 
D)  $8,686.82 
E)  $9,588.05

Question 9

The government imposed a fine on the Not-So-Legal Company. The fine calls for a payment of $100,000 today, $150,000 one year from today, and $200,000 two years from today. The government will hold the funds until the final payment is collected and then donate the entire amount to charity. The government has agreed to pay annual interest of 3 percent on the held funds. How much will be donated to charity in two years?

Accepted Answer

A)  $475,000.00 
B)  $460,590.00 
C)  $447,174.76 
D)  $451,050.05 
E)  $474,407.70 
A)  $475,000.00 
B)  $460,590.00 
C)  $447,174.76 
D)  $451,050.05 
E)  $474,407.70

Question 10

Alan Burnie has just started work and has been wanting to buy a sleek powerboat for sometime. Rather than purchase and finance now, he plans to save every three months and increase the deposits by 3% per annum as he expects raises at least that large. How much must the first deposit be if the boat costs $25,000 today and he expects to earn 10% on the money over the next five years?

Accepted Answer

A)  $1,501.56 
B)  $2,081.99 
C)  $1,561.49 
D)  $6,097.27 
E)  $2,359.82 
A)  $1,501.56 
B)  $2,081.99 
C)  $1,561.49 
D)  $6,097.27 
E)  $2,359.82

Question 11

There are three factors that affect the present value of an annuity. Explain what these three factors are and discuss how an increase in each will impact the present value of the annuity.

Accepted Answer

The factors are the interest rate, payme

Question 12

You are comparing two annuities with equal present values. The applicable discount rate is 6.5 percent. One annuity will pay $2,000 annually, starting today, for 20 years. The second annuity will pay annually, starting one year from today, for 20 years. What is the annual payment for the second annuity?

Accepted Answer

A)  $2,225 
B)  $2,075 
C)  $2,000 
D)  $2,130 
E)  $2,405 
A)  $2,225 
B)  $2,075 
C)  $2,000 
D)  $2,130 
E)  $2,405

Question 13

What is meant by "amortizing a loan"?

Accepted Answer

Amortizing a loan is when the borrower p

Question 14

You have a sub-contracting job with a local manufacturing firm. Your agreement calls for annual payments of $50,000 for the next five years. At a discount rate of 12%, what is this job worth to you today?

Accepted Answer

A)  $180,238.81 
B)  $201,867.47 
C)  $210,618.19 
D)  $223,162.50 
E)  $224,267.10 
A)  $180,238.81 
B)  $201,867.47 
C)  $210,618.19 
D)  $223,162.50 
E)  $224,267.10

Question 15

Present value may be defined as:

Accepted Answer

A)  future cash flows discounted to the present. 
B)  official prescribed price. 
C)  present cash flows compounded into the future. 
D)  the average of the bid and asked price. 
A)  future cash flows discounted to the present. 
B)  official prescribed price. 
C)  present cash flows compounded into the future. 
D)  the average of the bid and asked price.

Question 16

The equation (1 + (r/m))m-1 gives the:

Accepted Answer

A)  effective annual interest rate, and r is the stated annual interest rate. 
B)  effective annual interest rate, and m is the number of years to maturity. 
C)  stated annual interest rate, and r is the effective annual interest rate. 
D)  stated annual interest rate, and m is the number of years to maturity. 
A)  effective annual interest rate, and r is the stated annual interest rate. 
B)  effective annual interest rate, and m is the number of years to maturity. 
C)  stated annual interest rate, and r is the effective annual interest rate. 
D)  stated annual interest rate, and m is the number of years to maturity.

Question 17

As an excellent student in environmental ecology you have been awarded the "Clean Effluent Prize" by state agency. You (or your estate) are to receive $300 forever from the state or the agency will allow you to choose $400 over the next 25 years. Payments are to be received semi-annually and if the market rate of interest is 6% what is the value of the two options respectively?

Accepted Answer

A)  $30,000; $10,000.25 
B)  $5,000; $5,145.95 
C)  $10,000; $6,304.74 
D)  $2,500; $3,859.46 
E)  $6,666.67; $5,113.34 
A)  $30,000; $10,000.25 
B)  $5,000; $5,145.95 
C)  $10,000; $6,304.74 
D)  $2,500; $3,859.46 
E)  $6,666.67; $5,113.34

Question 18

What is the net present value of a project that contributes $25,000 at the end of the first year and $12,000 at the end of the second year. The initial cost is $33,000. The appropriate interest rate is 7% for the first year and 10% for the second year.

Accepted Answer

A)  $1,579.44 
B)  $559.90 
C)  $281.85 
D)  -$2,148.26 
A)  $1,579.44 
B)  $559.90 
C)  $281.85 
D)  -$2,148.26

Question 19

Charles Carr borrowed $3,500 to consolidate his debts. Since Charles had an excellent credit rating, he was able to borrow at a 12% effective annual rate. Charles is required to make monthly payments. Charles will make equal payments for the next 36 months. Which one of the following values is closest to his monthly payments?

Accepted Answer

A)  $121 
B)  $122 
C)  $115 
D)  $118 
E)  $123 
A)  $121 
B)  $122 
C)  $115 
D)  $118 
E)  $123

Question 20

A mortgage instrument pays $1.5 million at the end of each of the next two years. An investor has an alternative investment with the same amount of risk that will pay interest at 8% compounded semiannually. Which of the following amounts is closest to what the investor should pay for the mortgage instrument?

Accepted Answer

A)  $1.28 million. 
B)  $1.39 million. 
C)  $2.67 million. 
D)  $2.72 million. 
A)  $1.28 million. 
B)  $1.39 million. 
C)  $2.67 million. 
D)  $2.72 million.

Exam 5: The Time Value of Money

The time value of money concept can be defined as:

An annuity:

The interest rate charged per period multiplied by the number of periods per year is called the _____ rate.

A "little seven" accounting firm offers to pay you a year-end bonus of $5,000 for 3 years if you will accept employment with them and stay for the entire 3-year period. Which of the following amounts is closest to the present value of the bonus if the interest rate is 10%?

Find the present value of $5325.00 to be received in one period if the rate is 6.50%.

The equation [Ct/(1 + r)t] provides:

Tina is able to pay $160 a month for five years for a car. If the interest rate is 4.9%, how much can Tina afford to borrow to buy a car?

There are three factors that affect the present value of an annuity. Explain what these three factors are and discuss how an increase in each will impact the present value of the annuity.

What is meant by "amortizing a loan"?

You have a sub-contracting job with a local manufacturing firm. Your agreement calls for annual payments of $50,000 for the next five years. At a discount rate of 12%, what is this job worth to you today?

Present value may be defined as:

The equation (1 + (r/m))m-1 gives the:

What is the net present value of a project that contributes $25,000 at the end of the first year and $12,000 at the end of the second year. The initial cost is $33,000. The appropriate interest rate is 7% for the first year and 10% for the second year.

Introduction to Corporate Finance

Accounting Statements and Cash Flow

Financial Planning and Growth

Financial Markets and Net Present Value: First Principles of Finance

How to Value Bonds and Stocks

Net Present Value and Other Investment Rules

Net Present Value and Capital Budgeting

Risk Analysis, Real Options, and Capital Budgeting

Risk and Return: Lessons From Market History

Risk and Return: the Capital Asset Pricing Model

An Alternative View of Risk and Return: the Arbitrage Pricing Theory

Risk, Return, and Capital Budgeting

Corporate Financing Decisions and Efficient Capital Markets

Long-Term Financing: an Introduction

Capital Structure: Basic Concepts

Capital Structure: Limits to the Use of Debt

Valuation and Capital Budgeting for the Levered Firm

Dividends and Other Payouts

Issuing Equity Securities to the Public

Long-Term Debt

Leasing

Options and Corporate Finance: Basic Concepts

Options and Corporate Finance: Extensions and Applications

Warrants and Convertibles

Derivatives and Hedging Risk

Short-Term Finance and Planning

Cash Management

Credit Management

Mergers and Acquisitions

Financial Distress

International Corporate Finance

Filters

The equation [Ct/(1 + r)^t] provides:

The equation (1 + (r/m))^m-1 gives the: