Question 1

When the net present value (NPV)of an investment is positive,the benefits exceed the costs and the investment should be made.

Accepted Answer

A) True 
 B)False

Question 2

A growing perpetuity where the rate of growth is greater than the discount rate will have an infinitely large present value (PV).

Accepted Answer

A) True 
 B)False

Question 3

Matthew wants to take out a loan to buy a car.He calculates that he can make repayments of $4000 per year.If he can get a five-year loan with an interest rate of 7.5%,what is the maximum price he can pay for the car?

Accepted Answer

A)  $16,184 
B)  $18,243 
C)  $20,324 
D)  $21,674 
E)  $20,000 
A)  $16,184 
B)  $18,243 
C)  $20,324 
D)  $21,674 
E)  $20,000

Question 4

AB Company has decided to donate to the children's hospital every year.The company 's first payment will be $1 million and it will grow at a constant rate of 3% forever.What is the present value of this growing perpetuity if the current market rate is 5%?

Accepted Answer

A)  $150 million 
B)  $20 million 
C)  $33.33 million 
D)  $53.33 million 
E)  $50 million 
A)  $150 million 
B)  $20 million 
C)  $33.33 million 
D)  $53.33 million 
E)  $50 million

Question 5

Consider the following timeline detailing a stream of cash flows:  
If the current market rate of interest is 6%,then the future value (FV)of this stream of cash flows is closest to:

Accepted Answer

A)  $1723 
B)  $1500 
C)  $1626 
D)  $1288 
E)  $2007 
A)  $1723 
B)  $1500 
C)  $1626 
D)  $1288 
E)  $2007

Question 6

A business is deciding whether to give an end-of-year bonus of $5000 each year for the next four years to an employee,in order to increase the number of sales that employee makes.What is the minimum extra profit the employee must generate this year for the bonus to be worthwhile over the next four years,if the discount rate is 7%?

Accepted Answer

A)  $12,263 
B)  $14,480 
C)  $16,936 
D)  $20,000 
E)  $18,600 
A)  $12,263 
B)  $14,480 
C)  $16,936 
D)  $20,000 
E)  $18,600

Question 7

Faisal has $15,000 in his savings account and can save an additional $5000 per year.If interest rates are 12%,how long will it take his savings to grow to $50,000?

Accepted Answer

A)    years 
B)  3 years 
C)    years 
D)  5 years 
E)  4 years 
A)    years 
B)  3 years 
C)    years 
D)  5 years 
E)  4 years

Question 8

James is a law student who wishes to understand how a perpetuity works.His grandfather invested in a perpetual bond 25 years ago,which pays $15,000 annually at a 12% interest rate.What was the present value of the cash flows of this perpetuity when it was purchased?

Accepted Answer

A)  $84,753.35 
B)  $150,000 
C)  $125,000 
D)  $133,928.57 
E)  $16,800 
A)  $84,753.35 
B)  $150,000 
C)  $125,000 
D)  $133,928.57 
E)  $16,800

Question 9

To calculate the future value of an annuity,we divide the annuity formula by the appropriate discount factor.

Accepted Answer

A) True 
 B)False

Question 10

If $10,000 is invested in a certain business at the start of the year,the investor will receive $3000 at the end of each of the next four years.What is the net present value (NPV)of this business opportunity if the interest rate is 7% per year?

Accepted Answer

A)  $148.53 
B)  $161.63 
C)  $172.45 
D)  $178.88 
E)  $183.43 
A)  $148.53 
B)  $161.63 
C)  $172.45 
D)  $178.88 
E)  $183.43

Question 11

Suppose that a young couple has just had their first baby and they wish to ensure that enough money will be available to pay for their child's college education.They decide to make deposits into an educational savings account on each of their daughter's birthdays,starting with her first birthday.Assume that the educational savings account will return a constant 7%.The parents deposit $2000 on their daughter's first birthday and plan to increase the size of their deposits by 5% each year.Assuming that the parents have already made the deposit for their daughter's 18th birthday,then the amount available for the daughter's college expenses on her 18th birthday is closest to:

Accepted Answer

A)  $42,825 
B)  $97,331 
C)  $67,998 
D)  $103,063 
E)  $50,000 
A)  $42,825 
B)  $97,331 
C)  $67,998 
D)  $103,063 
E)  $50,000

Question 12

A rich donor gives a hospital $100,000 one year from today.Each year after that,the hospital will receive a payment 5% larger than the previous payment,with the last payment occurring in ten years' time.What is the present value (PV)of this donation,given that the interest rate is 9%?

Accepted Answer

A)  $467,922.22 
B)  $585,987.27 
C)  $772,173.49 
D)  $779,843.27 
E)  $1,120,727.79 
A)  $467,922.22 
B)  $585,987.27 
C)  $772,173.49 
D)  $779,843.27 
E)  $1,120,727.79

Question 13

Allan decides to invest in a new company which would allow him to receive $250,000 at the end of each year for the next 5 years.He purchases 100,000 shares at the price of $6.50.What is the NPV of a single share,if the interest rate is 15% per year?

Accepted Answer

A)  $8.38 
B)  $1.88 
C)  $6.00 
D)  $838,038.77 
E)  $188,038.77 
A)  $8.38 
B)  $1.88 
C)  $6.00 
D)  $838,038.77 
E)  $188,038.77

Question 14

When evaluating investment opportunities,we can compare and combine cash flows that occur at different points in time.

Accepted Answer

A) True 
 B)False

Question 15

Jessica deposits her $2,500 bonus cheque into the bank at the end of 2015.At the end of 2016 ,she deposits another bonus cheque,which is double the amount of last year's cheque.Given that the interest rate is 5%,what is the total future value of these two bonuses at the end of 2017?

Accepted Answer

A)  $7625 
B)  $8406.56 
C)  $7875 
D)  $7,500 
E)  $8,006.25 
A)  $7625 
B)  $8406.56 
C)  $7875 
D)  $7,500 
E)  $8,006.25

Question 16

Use the information for the question(s) below.
Suppose that a young couple has just had their first baby and they wish to ensure that enough money will be available to pay for their child's college education. Currently, college tuition, books, fees, and other costs average $12,500 per year. On average, tuition and other costs have historically increased at a rate of 4% per year.
-Assuming that college costs continue to increase an average of 4% per year and that all her college savings are invested in an account paying 7% interest,then the amount of money she will need to have available at age 18 to pay for all four years of her undergraduate education is closest to:

Accepted Answer

A)  $97,110 
B)  $107,532 
C)  $101,291 
D)  $50,000 
E)  $85,790 
A)  $97,110 
B)  $107,532 
C)  $101,291 
D)  $50,000 
E)  $85,790

Question 17

A businessman wants to buy a truck.The dealer offers to sell the truck for either $120,000 now,or six yearly payments of $25,000.Which of the following is closest to the interest rate being offered by the dealer?

Accepted Answer

A)  5% 
B)  7% 
C)  9% 
D)  11% 
E)  8% 
A)  5% 
B)  7% 
C)  9% 
D)  11% 
E)  8%

Question 18

How do you calculate (mathematically)the present value (PV)of a(n):
(a)perpetuity
(b)annuity
(c)growing perpetuity
(d)growing annuity

Accepted Answer

(a)PV of a perpetuity = @#IMG-DLM& 
(b)P

Question 19

What is the Net Present Value of this investment,given that the interest rate is 5%?

Accepted Answer

A)  $100,000 
B)  $0 
C)  -$1,190.48 
D)  -$3,514.74 
E)  -$22,222.22 
A)  $100,000 
B)  $0 
C)  -$1,190.48 
D)  -$3,514.74 
E)  -$22,222.22

Question 20

A bank is negotiating a loan.The loan can either be paid off as a lump sum of $100,000 at the end of five years,or as equal annual payments at the end of each of the next five years.If the interest rate on the loan is 10%,what annual payments should be made so that both forms of payment are equivalent?

Accepted Answer

A)  $12,000 
B)  $16,380 
C)  $19,588 
D)  $20,000 
E)  $18,000 
A)  $12,000 
B)  $16,380 
C)  $19,588 
D)  $20,000 
E)  $18,000

Exam 4: The Time Value of Money

When the net present value (NPV)of an investment is positive,the benefits exceed the costs and the investment should be made.

A growing perpetuity where the rate of growth is greater than the discount rate will have an infinitely large present value (PV).

Matthew wants to take out a loan to buy a car.He calculates that he can make repayments of $4000 per year.If he can get a five-year loan with an interest rate of 7.5%,what is the maximum price he can pay for the car?

AB Company has decided to donate to the children's hospital every year.The company 's first payment will be $1 million and it will grow at a constant rate of 3% forever.What is the present value of this growing perpetuity if the current market rate is 5%?

Consider the following timeline detailing a stream of cash flows: If the current market rate of interest is 6%,then the future value (FV)of this stream of cash flows is closest to:

Faisal has $15,000 in his savings account and can save an additional $5000 per year.If interest rates are 12%,how long will it take his savings to grow to $50,000?

James is a law student who wishes to understand how a perpetuity works.His grandfather invested in a perpetual bond 25 years ago,which pays $15,000 annually at a 12% interest rate.What was the present value of the cash flows of this perpetuity when it was purchased?

To calculate the future value of an annuity,we divide the annuity formula by the appropriate discount factor.

If $10,000 is invested in a certain business at the start of the year,the investor will receive $3000 at the end of each of the next four years.What is the net present value (NPV)of this business opportunity if the interest rate is 7% per year?

A rich donor gives a hospital $100,000 one year from today.Each year after that,the hospital will receive a payment 5% larger than the previous payment,with the last payment occurring in ten years' time.What is the present value (PV)of this donation,given that the interest rate is 9%?

Allan decides to invest in a new company which would allow him to receive $250,000 at the end of each year for the next 5 years.He purchases 100,000 shares at the price of $6.50.What is the NPV of a single share,if the interest rate is 15% per year?

When evaluating investment opportunities,we can compare and combine cash flows that occur at different points in time.

Jessica deposits her $2,500 bonus cheque into the bank at the end of 2015.At the end of 2016 ,she deposits another bonus cheque,which is double the amount of last year's cheque.Given that the interest rate is 5%,what is the total future value of these two bonuses at the end of 2017?

A businessman wants to buy a truck.The dealer offers to sell the truck for either $120,000 now,or six yearly payments of $25,000.Which of the following is closest to the interest rate being offered by the dealer?

How do you calculate (mathematically)the present value (PV)of a(n): (a)perpetuity (b)annuity (c)growing perpetuity (d)growing annuity

What is the Net Present Value of this investment,given that the interest rate is 5%?

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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