Question 1

What is the effective annual rate if a bank charges you 7.64% compounded quarterly?

Accepted Answer

A)  7.79% 
B)  7.86% 
C)  7.95% 
D)  7.98% 
E)  8.01% 
A)  7.79% 
B)  7.86% 
C)  7.95% 
D)  7.98% 
E)  8.01%

Question 2

A sports team in an effort to solve the salary cap problem has offered a player a contract of $1 million dollars a year for the next season with the payments growing at 7% per year for the next 25 years. The player believes the discount rate for such payments is 13%. What is the value today of taking this contract?

Accepted Answer

A)  $12,405,955.40 
B)  $16,666,666.67 
C)  $884,956.09 
D)  $5,824,965.76 
A)  $12,405,955.40 
B)  $16,666,666.67 
C)  $884,956.09 
D)  $5,824,965.76

Question 3

The compound value is defined as:

Accepted Answer

A)  the value of a dollar received tomorrow. 
B)  the value of a sum after investing over one or more periods. 
C)  the value of a sum today to received in the future. 
D)  the rate of growth in a sum today. 
A)  the value of a dollar received tomorrow. 
B)  the value of a sum after investing over one or more periods. 
C)  the value of a sum today to received in the future. 
D)  the rate of growth in a sum today.

Question 4

The present value factor is:

Accepted Answer

A)  the dollar amount of the future value. 
B)  the rate that equates the present value with the future value. 
C)  the process of calculating future or present values. 
D)  the value of $1 to be received in T periods at a given interest rate. 
A)  the dollar amount of the future value. 
B)  the rate that equates the present value with the future value. 
C)  the process of calculating future or present values. 
D)  the value of $1 to be received in T periods at a given interest rate.

Question 5

The BobIU Computer Graphics Co. has just produced a new multimedia graphics chip which will cost $6,000,000 this year to put into production. They anticipate net cash flows of $3 million next year, $2million, $1 million, $.5 million, $.25 million and then $0 over each of the following years. The two owners require a 15% return on their investment. The value of this investment to the firm is:

Accepted Answer

A)  $750,000.10 
B)  -$811,329.97 
C)  $556,462.71 
D)  $652,173.91 
E)  -$371,782.85 
A)  $750,000.10 
B)  -$811,329.97 
C)  $556,462.71 
D)  $652,173.91 
E)  -$371,782.85

Question 6

In the equation, NPV = -Cost + PV, the term Cost is the:

Accepted Answer

A)  current value of the commitment fee today. 
B)  current value of the terminal cash flow. 
C)  initial cash outflow. 
D)  present value of the variable costs. 
A)  current value of the commitment fee today. 
B)  current value of the terminal cash flow. 
C)  initial cash outflow. 
D)  present value of the variable costs.

Question 7

An equal stream of payments that lasts forever is:

Accepted Answer

A)  a growing annuity. 
B)  a zero-coupon bond. 
C)  a perpetuity. 
D)  valueless. 
A)  a growing annuity. 
B)  a zero-coupon bond. 
C)  a perpetuity. 
D)  valueless.

Question 8

Which of the following amounts is closest to the end value of investing $10,000 for 1 1/2 years at a stated annual interest rate of 12% compounded quarterly?

Accepted Answer

A)  $11,800 
B)  $11,852 
C)  $11,941 
D)  $11,961 
A)  $11,800 
B)  $11,852 
C)  $11,941 
D)  $11,961

Question 9

Aunt Clarisse has promised to leave you an annuity that will pay $60 next year and grow at an annual rate of 4%. The payments are expected to go on indefinitely and the interest rate is 9%. What is the value of the growing perpetuity?

Accepted Answer

A)  $667 
B)  $693 
C)  $1,200 
D)  $1,248 
A)  $667 
B)  $693 
C)  $1,200 
D)  $1,248

Question 10

Your parents are giving you $100 a month for four years while you are in college. At a 6% discount rate, what are these payments worth to you when you first start college?

Accepted Answer

A)  $3,797.40 
B)  $4,167.09 
C)  $4,198.79 
D)  $4,258.03 
E)  $4,279.32 
A)  $3,797.40 
B)  $4,167.09 
C)  $4,198.79 
D)  $4,258.03 
E)  $4,279.32

Question 11

Which of the following amounts is closest to the present value of a payment of $21,000 three years from now if the effective annual interest rate is 4%?

Accepted Answer

A)  $18,669 
B)  $18,658 
C)  $19,218 
D)  $18,480 
E)  $17,951 
A)  $18,669 
B)  $18,658 
C)  $19,218 
D)  $18,480 
E)  $17,951

Question 12

If the compound period is greater than one:

Accepted Answer

A)  the effective annual interest rate is always equal to the annual percentage rate. 
B)  the effective annual interest rate is always less than the annual percentage rate. 
C)  the effective annual interest rate is always greater than the annual percentage rate. 
D)  the effective annual interest rate is never greater than the annual percentage rate. 
A)  the effective annual interest rate is always equal to the annual percentage rate. 
B)  the effective annual interest rate is always less than the annual percentage rate. 
C)  the effective annual interest rate is always greater than the annual percentage rate. 
D)  the effective annual interest rate is never greater than the annual percentage rate.

Question 13

A court settlement awarded an accident victim four payments of $50,000 to be paid at the end of each of the next four years. Using a discount rate of 4%, calculate the present value of the annuity.

Accepted Answer

A)  $173,255 
B)  $178,495 
C)  $181,495 
D)  $184,095 
E)  $200,000 
A)  $173,255 
B)  $178,495 
C)  $181,495 
D)  $184,095 
E)  $200,000

Question 14

You are the beneficiary of a life insurance policy. The insurance company informs you that you have two options for receiving the insurance proceeds. You can receive a lump sum of $50,000 today or receive payments of $641 a month for ten years. You can earn 6.5% on your money. Which option should you take and why?

Accepted Answer

A)  You should accept the payments because they are worth $56,451.91 today. 
B)  You should accept the payments because they are worth $56,523.74 today. 
C)  You should accept the payments because they are worth $56,737.08 today. 
D)  You should accept the $50,000 because the payments are only worth $47,757.69 today. 
E)  You should accept the $50,000 because the payments are only worth $47,808.17 today. 
A)  You should accept the payments because they are worth $56,451.91 today. 
B)  You should accept the payments because they are worth $56,523.74 today. 
C)  You should accept the payments because they are worth $56,737.08 today. 
D)  You should accept the $50,000 because the payments are only worth $47,757.69 today. 
E)  You should accept the $50,000 because the payments are only worth $47,808.17 today.

Question 15

Which of the following amounts is closest to the end value of investing $9,000 for 7 years at a continuously compounded rate of 11%?

Accepted Answer

A)  $18,685.44 
B)  $19,369.83 
C)  $15,930.00 
D)  $19,437.90 
A)  $18,685.44 
B)  $19,369.83 
C)  $15,930.00 
D)  $19,437.90

Question 16

The discount rate is adjusted:

Accepted Answer

A)  upward to reflect higher risk and to increase the future cash flows. 
B)  upward to reflect higher risk and to reduce the future cash flows. 
C)  downward to reflect higher risk and to increase the future cash flows. 
D)  downward to reflect higher risk and to reduce the future cash flows. 
A)  upward to reflect higher risk and to increase the future cash flows. 
B)  upward to reflect higher risk and to reduce the future cash flows. 
C)  downward to reflect higher risk and to increase the future cash flows. 
D)  downward to reflect higher risk and to reduce the future cash flows.

Question 17

Which of the following amounts is closest to the end value of investing $3,000 for 3/4 year at a continuously compounded rate of 12%?

Accepted Answer

A)  $3,163 
B)  $3,283 
C)  $3,263 
D)  $3,287 
E)  $3,317 
A)  $3,163 
B)  $3,283 
C)  $3,263 
D)  $3,287 
E)  $3,317

Question 18

What is the future value of the following cash flows at the end of year 3 if the interest rate is 6%? The cash flows occur at the end of each year.

Accepted Answer

A)  $15,916.78 
B)  $18,109.08 
C)  $18,246.25 
D)  $19,341.02 
E)  $19,608.07 
A)  $15,916.78 
B)  $18,109.08 
C)  $18,246.25 
D)  $19,341.02 
E)  $19,608.07

Question 19

If you have a choice to earn simple interest on $10,000 for three years at 8% or compound interest at 7.5% for three years which one will pay more and by how much?

Accepted Answer

A)  Simple interest by $1,500. 
B)  Compound interest by $22.97. 
C)  Compound interest by $150.75. 
D)  Simple interest by $150.00. 
A)  Simple interest by $1,500. 
B)  Compound interest by $22.97. 
C)  Compound interest by $150.75. 
D)  Simple interest by $150.00.

Question 20

Your employer contributes $25 a week to your retirement plan. Assume that you work for your employer for another twenty years and that the applicable discount rate is 5%. Given these assumptions, what is this employee benefit worth to you today?

Accepted Answer

A)  $13,144.43 
B)  $15,920.55 
C)  $16,430.54 
D)  $16,446.34 
E)  $16,519.02 
A)  $13,144.43 
B)  $15,920.55 
C)  $16,430.54 
D)  $16,446.34 
E)  $16,519.02

Exam 5: The Time Value of Money

What is the effective annual rate if a bank charges you 7.64% compounded quarterly?

The compound value is defined as:

The present value factor is:

In the equation, NPV = -Cost + PV, the term Cost is the:

An equal stream of payments that lasts forever is:

Which of the following amounts is closest to the end value of investing $10,000 for 1 1/2 years at a stated annual interest rate of 12% compounded quarterly?

Aunt Clarisse has promised to leave you an annuity that will pay $60 next year and grow at an annual rate of 4%. The payments are expected to go on indefinitely and the interest rate is 9%. What is the value of the growing perpetuity?

Your parents are giving you $100 a month for four years while you are in college. At a 6% discount rate, what are these payments worth to you when you first start college?

Which of the following amounts is closest to the present value of a payment of $21,000 three years from now if the effective annual interest rate is 4%?

If the compound period is greater than one:

A court settlement awarded an accident victim four payments of $50,000 to be paid at the end of each of the next four years. Using a discount rate of 4%, calculate the present value of the annuity.

Which of the following amounts is closest to the end value of investing $9,000 for 7 years at a continuously compounded rate of 11%?

The discount rate is adjusted:

Which of the following amounts is closest to the end value of investing $3,000 for 3/4 year at a continuously compounded rate of 12%?

What is the future value of the following cash flows at the end of year 3 if the interest rate is 6%? The cash flows occur at the end of each year.

If you have a choice to earn simple interest on $10,000 for three years at 8% or compound interest at 7.5% for three years which one will pay more and by how much?

Your employer contributes $25 a week to your retirement plan. Assume that you work for your employer for another twenty years and that the applicable discount rate is 5%. Given these assumptions, what is this employee benefit worth to you today?

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

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