Question 1

If the current rate of interest is 8%,then the future value (FV)of an investment that pays $1000 per year and lasts 20 years is closest to:

Accepted Answer

A)  $18,519 
B)  $45,762 
C)  $9,818 
D)  $20,000 
E)  $10,016 
A)  $18,519 
B)  $45,762 
C)  $9,818 
D)  $20,000 
E)  $10,016 B

Question 2

An annuity will pay you $1,000 per year for 75 years.What is the PV of this annuity if your cost of capital is 4%?

Accepted Answer

A)  $25,000 
B)  $72,115 
C)  $75,000 
D)  $23,680 
E)  $24,038 
A)  $25,000 
B)  $72,115 
C)  $75,000 
D)  $23,680 
E)  $24,038 D

Question 3

JJ & Co has decided to donate money to a cancer research fund every year for the next 25 years.They will make annual payments of $3.5 million.What is the present value of their donation if the current market rate is 7.5%?

Accepted Answer

A)  $87.5 million 
B)  $14.3 million 
C)  $33.33 million 
D)  $46.7 million 
E)  $39.0 million 
A)  $87.5 million 
B)  $14.3 million 
C)  $33.33 million 
D)  $46.7 million 
E)  $39.0 million E

Question 4

Since your first birthday,your grandparents have been depositing $1000 into a savings account on every one of your birthdays.The account pays 4% interest annually.Immediately after your grandparents make the deposit on your 18th birthday,the amount of money in your savings account will be closest to:

Accepted Answer

A)  $25,645 
B)  $36,465 
C)  $12,659 
D)  $18,000 
E)  $50,645 
A)  $25,645 
B)  $36,465 
C)  $12,659 
D)  $18,000 
E)  $50,645

Question 5

You are saving money for the down payment on a house.If you can save $7,500 per year for the next five years at an interest rate of 8%,how much will you have saved at the end of five years?

Accepted Answer

A)  $40,500 
B)  $37,500 
C)  $44,000 
D)  $29,945 
E)  $93,750 
A)  $40,500 
B)  $37,500 
C)  $44,000 
D)  $29,945 
E)  $93,750

Question 6

A business promises to pay the investor of $2000 today a payment of $500 in one year's time,$1000 in two years' time and $1000 in three years' time.What is the present value of this business opportunity if the interest rate is 5% per year?

Accepted Answer

A)  $247.06 
B)  $253.78 
C)  $256.88 
D)  $261.07 
E)  $273.09 
A)  $247.06 
B)  $253.78 
C)  $256.88 
D)  $261.07 
E)  $273.09

Question 7

Mark invests in a 10-year annuity with an initial payment of $20,000,that grows at 4% per year. What is the future value of this annuity,if the interest rate is 8%?

Accepted Answer

A)  $200,000 
B)  $339,340.36 
C)  $157,180.24 
D)  $162,217.92 
E)  $350,216.31 
A)  $200,000 
B)  $339,340.36 
C)  $157,180.24 
D)  $162,217.92 
E)  $350,216.31

Question 8

Can we apply the annuity or perpetuity equations to cash flows that do not arrive at regular intervals?

Accepted Answer

No,these formulas only apply w

Question 9

You are given two choices of investments,Investment A and Investment B.Both investments have the same future cash flows.Investment A has a discount rate of 4%,and Investment B has a discount rate of 5%.Which of the following is true?

Accepted Answer

A)  The present value of cash flows in Investment A is higher than the present value of cash flows in Investment B. 
B)  The present value of cash flows in Investment A is lower than the present value of cash flows in Investment B. 
C)  The present value of cash flows in Investment A is equal to the present value of cash flows in Investment B. 
D)  The present value of cash flows in Investment A is half the present value of cash flows in Investment B. 
E)  No comparison can be made - we need to know the cash flows to calculate the present value. 
A)  The present value of cash flows in Investment A is higher than the present value of cash flows in Investment B. 
B)  The present value of cash flows in Investment A is lower than the present value of cash flows in Investment B. 
C)  The present value of cash flows in Investment A is equal to the present value of cash flows in Investment B. 
D)  The present value of cash flows in Investment A is half the present value of cash flows in Investment B. 
E)  No comparison can be made - we need to know the cash flows to calculate the present value.

Question 10

An annuity will pay you $1,000 per year for 30 years.What is the FV of this annuity at the end of 30 years,if your cost of capital is 3%?

Accepted Answer

A)  $47,575 
B)  $19,600 
C)  $30,131 
D)  $30,000 
E)  $30,900 
A)  $47,575 
B)  $19,600 
C)  $30,131 
D)  $30,000 
E)  $30,900

Question 11

You are interested in purchasing a new automobile that costs $35,000.The dealership offers you a special financing rate of 6% APR (0.5%)per month for 48 months.Assuming that you do not make a down payment on the auto and you take the dealer's financing deal,then your monthly car payments would be closest to:

Accepted Answer

A)  $729 
B)  $822 
C)  $842 
D)  $647 
E)  $789 
A)  $729 
B)  $822 
C)  $842 
D)  $647 
E)  $789

Question 12

How long will it take $50,000 placed in a savings account at 10% interest to grow into $75,000?

Accepted Answer

A)  4.25 years 
B)  5.00 years 
C)  5.25 years 
D)  5.50 years 
E)  4.75 years 
A)  4.25 years 
B)  5.00 years 
C)  5.25 years 
D)  5.50 years 
E)  4.75 years

Question 13

The present value of an annuity that pays $1 million per year for n years,is $9 million.If the interest rate is 5% per annum,n is approximately equal to how many years?

Accepted Answer

A)  45 years 
B)  8 years 
C)  11 years 
D)  16.5 years 
E)  12.25 years 
A)  45 years 
B)  8 years 
C)  11 years 
D)  16.5 years 
E)  12.25 years

Question 14

What is the internal rate of return (IRR)of an investment that requires an initial investment of $10,000 today and pays $14,000 in one year's time?

Accepted Answer

A)  4% 
B)  14% 
C)  24% 
D)  40% 
E)  33% 
A)  4% 
B)  14% 
C)  24% 
D)  40% 
E)  33%

Question 15

A consol bond (perpetual bond)pays $27,500 every year.If its present value is $3,000,000,what is the interest rate?

Accepted Answer

A)  9.17% 
B)  3% 
C)  0.275% 
D)  0.917% 
E)  2.75% 
A)  9.17% 
B)  3% 
C)  0.275% 
D)  0.917% 
E)  2.75%

Question 16

What is the total future value of these cash flows in year 4,given that the interest rate is 10%?

Accepted Answer

A)  $80,000 
B)  $65,134.35 
C)  $117,128 
D)  $95,363.20 
E)  $75,363.20 
A)  $80,000 
B)  $65,134.35 
C)  $117,128 
D)  $95,363.20 
E)  $75,363.20

Question 17

Martin wants to provide money in his will for an annual bequest to whichever of his living relatives is oldest.That bequest will provide $1000 in the first year,and will grow by 7% per year,forever.If the interest rate is 11%,how much must Martin provide to fund this bequest?

Accepted Answer

A)  $9090.91 
B)  $14,285.71 
C)  $25,000.00 
D)  $36,687.45 
E)  $5555.56 
A)  $9090.91 
B)  $14,285.71 
C)  $25,000.00 
D)  $36,687.45 
E)  $5555.56

Question 18

The timeline below shows a $10,000 dollar investment that is being compounded at a set rate per year.What is that rate?

Accepted Answer

A)  11.25% 
B)  12.50% 
C)  15.00% 
D)  18.50% 
E)  16.25% 
A)  11.25% 
B)  12.50% 
C)  15.00% 
D)  18.50% 
E)  16.25%

Question 19

Jason buys a consol (perpetual bond)that pays out a fixed cash flow of $750,000 every year,forever,starting at the end of this year.If the current market rate is 12.5%,what is the present value of the cash flows?

Accepted Answer

A)  $6,000,000 
B)  $750,000 
C)  $843,750 
D)  $600,000 
E)  $7,500,000 
A)  $6,000,000 
B)  $750,000 
C)  $843,750 
D)  $600,000 
E)  $7,500,000

Question 20

Which of the following is true about perpetuities?

Accepted Answer

A)  Since a perpetuity generates cash flows every period infinitely, the cash flow generated equals the PV times the interest rate. 
B)  Since a perpetuity generates cash flows every period infinitely, each cash flow must be discounted to calculate the present value. 
C)  Since a perpetuity generates cash flows every period infinitely, there is no way to solve for the cash flow given the present value and the interest rate. 
D)  A perpetuity does not generate cash flows every period infinitely. 
E)  Since a perpetuity generate cash flows every period infinitely, the cash flow generated equals the PV divided by the interest rate. 
A)  Since a perpetuity generates cash flows every period infinitely, the cash flow generated equals the PV times the interest rate. 
B)  Since a perpetuity generates cash flows every period infinitely, each cash flow must be discounted to calculate the present value. 
C)  Since a perpetuity generates cash flows every period infinitely, there is no way to solve for the cash flow given the present value and the interest rate. 
D)  A perpetuity does not generate cash flows every period infinitely. 
E)  Since a perpetuity generate cash flows every period infinitely, the cash flow generated equals the PV divided by the interest rate.

Exam 4: The Time Value of Money

If the current rate of interest is 8%,then the future value (FV)of an investment that pays $1000 per year and lasts 20 years is closest to:

An annuity will pay you $1,000 per year for 75 years.What is the PV of this annuity if your cost of capital is 4%?

JJ & Co has decided to donate money to a cancer research fund every year for the next 25 years.They will make annual payments of $3.5 million.What is the present value of their donation if the current market rate is 7.5%?

You are saving money for the down payment on a house.If you can save $7,500 per year for the next five years at an interest rate of 8%,how much will you have saved at the end of five years?

A business promises to pay the investor of $2000 today a payment of $500 in one year's time,$1000 in two years' time and $1000 in three years' time.What is the present value of this business opportunity if the interest rate is 5% per year?

Mark invests in a 10-year annuity with an initial payment of $20,000,that grows at 4% per year. What is the future value of this annuity,if the interest rate is 8%?

Can we apply the annuity or perpetuity equations to cash flows that do not arrive at regular intervals?

You are given two choices of investments,Investment A and Investment B.Both investments have the same future cash flows.Investment A has a discount rate of 4%,and Investment B has a discount rate of 5%.Which of the following is true?

An annuity will pay you $1,000 per year for 30 years.What is the FV of this annuity at the end of 30 years,if your cost of capital is 3%?

How long will it take $50,000 placed in a savings account at 10% interest to grow into $75,000?

The present value of an annuity that pays $1 million per year for n years,is $9 million.If the interest rate is 5% per annum,n is approximately equal to how many years?

What is the internal rate of return (IRR)of an investment that requires an initial investment of $10,000 today and pays $14,000 in one year's time?

A consol bond (perpetual bond)pays $27,500 every year.If its present value is $3,000,000,what is the interest rate?

What is the total future value of these cash flows in year 4,given that the interest rate is 10%?

Martin wants to provide money in his will for an annual bequest to whichever of his living relatives is oldest.That bequest will provide $1000 in the first year,and will grow by 7% per year,forever.If the interest rate is 11%,how much must Martin provide to fund this bequest?

The timeline below shows a $10,000 dollar investment that is being compounded at a set rate per year.What is that rate?

Jason buys a consol (perpetual bond)that pays out a fixed cash flow of $750,000 every year,forever,starting at the end of this year.If the current market rate is 12.5%,what is the present value of the cash flows?

Which of the following is true about perpetuities?

Corporate Finance and the Financial Manager

Introduction to Financial Statement Analysis

The Valuation Principle: the Foundation of Financial Decision Making

Interest Rates

Bonds

Valuing Stocks

Investment Decision Rules

Fundamentals of Capital Budgeting

Risk and Return in Capital Markets

Systematic Risk and the Equity Risk Premium

Determining the Cost of Capital

Risk and the Pricing of Options

Raising Equity Capital

Debt Financing

Capital Structure

Payout Policy

Financial Modelling and Pro Forma Analysis

Working Capital Management

Short Term Financial Planning

Risk Management

International Corporate Finance

Leasing

Mergers and Acquisitions

Corporate Governance

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