Question 1

The future value of a cash flow is positively related to interest rate and negatively related to the amount of time until maturity.

Accepted Answer

A) True 
 B)False  False

Question 2

Your employer has agreed to make 80 quarterly payments of $400 each into a trust account to fund your early retirement.The first payment will be made 3 months from now.At the end of 20 years (80 payments),you will be paid 10 equal annual payments,with the first payment to be made at the beginning of Year 21 (or the end of Year 20).The funds will be invested at a simple rate of 8.0 percent,quarterly compounding,during both the accumulation and the distribution periods.How large will each of your 10 receipts be? (Hint: You must find the effective annual rate and use it in one of your calculations. )

Accepted Answer

A)  $7,561 
B)  $10,789 
C)  $11,678 
D)  $12,342 
E)  $13,119 
A)  $7,561 
B)  $10,789 
C)  $11,678 
D)  $12,342 
E)  $13,119 B

Question 3

The post-audit two main purposes are to improve forecasts and to improve operations.

Accepted Answer

A) True 
 B)False  True

Question 4

A college intern working at Anderson Paints evaluated potential investments⎯that is,capital budgeting projects⎯using the firm's average required rate of return (WACC),and he produced the following report for the capital budgeting manager:   The capital budgeting manager usually considers the risks associated with capital budgeting projects before making her final decision.If a project has a risk that is different from average,she adjusts the average required rate of return by adding or subtracting 2 percentage points.If the four projected listed above are independent,which one(s)should the capital budgeting manager recommend be purchased?

Accepted Answer

A)  Project LOM only,because it has both the highest NPV and the higher IRR. 
B)  Projects LOM,QUE,and YUP,because they all have positive NPVs and their IRRs. 
C)  Projects DOG and QUE,because their IRRs are greater than their risk-adjusted discount he projects returns are higher than the rates of return that capital budgeting manager uses to evaluate them. 
D)  Projects QUE,YUP,and DOG,because their IRRs are greater than their risk-adjusted discount rates-that is,the projects returns are higher than the rates of return that capital budgeting manager uses to evaluate them. 
E)  There is not enough information to answer this question,because the firm's average required rate of return cannot be determined. 
A)  Project LOM only,because it has both the highest NPV and the higher IRR. 
B)  Projects LOM,QUE,and YUP,because they all have positive NPVs and their IRRs. 
C)  Projects DOG and QUE,because their IRRs are greater than their risk-adjusted discount he projects returns are higher than the rates of return that capital budgeting manager uses to evaluate them. 
D)  Projects QUE,YUP,and DOG,because their IRRs are greater than their risk-adjusted discount rates-that is,the projects returns are higher than the rates of return that capital budgeting manager uses to evaluate them. 
E)  There is not enough information to answer this question,because the firm's average required rate of return cannot be determined.

Question 5

Suppose you put $100 into a savings account today,the account pays a simple annual interest rate of 6 percent,but compounded semiannually,and you withdraw $100 after 6 months.What would your ending balance be 20 years after the initial $100 deposit was made?

Accepted Answer

A)  $226.20 
B)  $115.35 
C)  $62.91 
D)  $9.50 
E)  $3.00 
A)  $226.20 
B)  $115.35 
C)  $62.91 
D)  $9.50 
E)  $3.00

Question 6

There exists an IRR solution for each time the direction of cash flows associated with a project is interrupted.

Accepted Answer

A) True 
 B)False

Question 7

Steaks Galore needs to arrange financing for its expansion program.One bank offers to lend the required $1,000,000 on a loan which requires interest to be paid at the end of each quarter.The quoted rate is 10 percent,and the principal must be repaid at the end of the year.A second lender offers 9 percent,daily compounding (365-day year),with interest and principal due at the end of the year.What is the difference in the effective annual rates (EFF%)charged by the two banks?

Accepted Answer

A)  0.31% 
B)  0.53% 
C)  0.75% 
D)  0.96% 
E)  1.25% 
A)  0.31% 
B)  0.53% 
C)  0.75% 
D)  0.96% 
E)  1.25%

Question 8

The opportunity cost rate is only applicable if you as an investor actually have an alternative investment to compare.If you are making a decision about a single investment,the opportunity rate concept does not apply.

Accepted Answer

A) True 
 B)False

Question 9

The present value of a future cash flow is the amount of money if invested today at particular interest would turn into the future value at maturity.

Accepted Answer

A) True 
 B)False

Question 10

Supposed someone offered you the choice of two equally risky annuities,each paying $10,000 per year for five years.One is an ordinary (or deferred)annuity,the other is an annuity due.Which of the following statements is most correct?

Accepted Answer

A)  The present value of the ordinary annuity must exceed the present value of the annuity due,but the future value of an ordinary annuity may be less than the future value of the annuity due. 
B)  The present value of the annuity due exceeds the present value of the ordinary annuity,while the future value of the ordinary annuity. 
C)  The present value of the annuity due exceeds the present value of the ordinary annuity,and the future value of the annuity due also exceeds the future value of the ordinary annuity. 
D)  If interest rates increase,the difference between the present value of the ordinary annuity and the present value of the annuity due remains the same. 
E)  Both answers a and d are correct. 
A)  The present value of the ordinary annuity must exceed the present value of the annuity due,but the future value of an ordinary annuity may be less than the future value of the annuity due. 
B)  The present value of the annuity due exceeds the present value of the ordinary annuity,while the future value of the ordinary annuity. 
C)  The present value of the annuity due exceeds the present value of the ordinary annuity,and the future value of the annuity due also exceeds the future value of the ordinary annuity. 
D)  If interest rates increase,the difference between the present value of the ordinary annuity and the present value of the annuity due remains the same. 
E)  Both answers a and d are correct.

Question 11

Drexel Corporation has been enjoying a phenomenal rate of growth since its inception one year ago.Currently,its assets total $100,000.If growth continues at the current rate of 12 percent compounded quarterly,what will total assets be in 21/2 years?

Accepted Answer

A)  $142,571 
B)  $126,678 
C)  $148,016 
D)  $136,855 
E)  $134,392 
A)  $142,571 
B)  $126,678 
C)  $148,016 
D)  $136,855 
E)  $134,392

Question 12

An increase in the discount rate used in computing the NPV of a project will lower the value of the NPV for that project.

Accepted Answer

A) True 
 B)False

Question 13

All other factors held constant,the present value of a given annual annuity decreases as the number of discounting periods per year increases.

Accepted Answer

A) True 
 B)False

Question 14

A $10,000 loan is to be amortized over 5 years,with annual end-of-year payments.Given the following facts,which of these statements is correct?

Accepted Answer

A)  The annual payments would be larger if the interest rate were lower. 
B)  If the loan were amortized over 10 years rather than 5 years,and if the interest rate were the same in either case,the first payment would include more dollars of interest under the 5-year amortization plan. 
C)  The last payment would have a higher proportion of interest than the first payment. 
D)  The proportion of interest versus principal repayment would be the same for each of the 5 payments. 
E)  The proportion of each payment that represents interest as opposed to repayment of principal would be higher if the interest rate were higher. 
A)  The annual payments would be larger if the interest rate were lower. 
B)  If the loan were amortized over 10 years rather than 5 years,and if the interest rate were the same in either case,the first payment would include more dollars of interest under the 5-year amortization plan. 
C)  The last payment would have a higher proportion of interest than the first payment. 
D)  The proportion of interest versus principal repayment would be the same for each of the 5 payments. 
E)  The proportion of each payment that represents interest as opposed to repayment of principal would be higher if the interest rate were higher.

Question 15

Using the discounted payback method,a project should be accepted when the discounted payback is greater than the project's expected life.

Accepted Answer

A) True 
 B)False

Question 16

You have some money on deposit in a bank account which pays a simple (or quoted)rate of 8.0944 percent,but with interest compounded daily (using a 365-day year).Your friend owns a security which calls for the payment of $10,000 after 27 months.The security is just as safe as your bank deposit,and your friend offers to sell it to you for $8,000.If you buy the security,by how much will the effective annual rate of return on your investment change?

Accepted Answer

A)  1.87% 
B)  1.53% 
C)  2.00% 
D)  0.96% 
E)  0.44% 
A)  1.87% 
B)  1.53% 
C)  2.00% 
D)  0.96% 
E)  0.44%

Question 17

Suppose someone offered you your choice of two equally risky annuities,each paying $5,000 per year for 5 years.One is an annuity due,while the other is a regular (or deferred)annuity.If you are a rational wealth-maximizing investor which annuity would you choose?

Accepted Answer

A)  The annuity due. 
B)  The deferred annuity. 
C)  Either one,because as the problem is set up,they have the same present value. 
D)  Without information about the appropriate interest rate,we cannot find the values of the two annuities;hence we cannot tell which is better. 
E)  The annuity due;however,if the payments on both were doubled to $10,000,the deferred annuity would be preferred. 
A)  The annuity due. 
B)  The deferred annuity. 
C)  Either one,because as the problem is set up,they have the same present value. 
D)  Without information about the appropriate interest rate,we cannot find the values of the two annuities;hence we cannot tell which is better. 
E)  The annuity due;however,if the payments on both were doubled to $10,000,the deferred annuity would be preferred.

Question 18

You have just taken out a 30-year,$120,000 mortgage on your new home.This mortgage is to be repaid in 360 equal end-of-month installments.If each of the monthly installments is $1,500,what is the effective annual interest rate on this mortgage?

Accepted Answer

A)  15.87% 
B)  14.75% 
C)  13.38% 
D)  16.25% 
E)  16.49% 
A)  15.87% 
B)  14.75% 
C)  13.38% 
D)  16.25% 
E)  16.49%

Question 19

If $100 is placed in an account that earns a simple 4 percent,compounded quarterly,what will it be worth in 5 years?

Accepted Answer

A)  $122.02 
B)  $105.10 
C)  $135.41 
D)  $120.90 
E)  $117.48 
A)  $122.02 
B)  $105.10 
C)  $135.41 
D)  $120.90 
E)  $117.48

Question 20

Financial calculator and tabular methods use different mathematical formulas to solve time value of money problems,and that is why they always lead to different results.

Accepted Answer

A) True 
 B)False

The future value of a cash flow is positively related to interest rate and negatively related to the amount of time until maturity.

The post-audit two main purposes are to improve forecasts and to improve operations.

Suppose you put $100 into a savings account today,the account pays a simple annual interest rate of 6 percent,but compounded semiannually,and you withdraw $100 after 6 months.What would your ending balance be 20 years after the initial $100 deposit was made?

There exists an IRR solution for each time the direction of cash flows associated with a project is interrupted.

The opportunity cost rate is only applicable if you as an investor actually have an alternative investment to compare.If you are making a decision about a single investment,the opportunity rate concept does not apply.

The present value of a future cash flow is the amount of money if invested today at particular interest would turn into the future value at maturity.

Supposed someone offered you the choice of two equally risky annuities,each paying $10,000 per year for five years.One is an ordinary (or deferred)annuity,the other is an annuity due.Which of the following statements is most correct?

Drexel Corporation has been enjoying a phenomenal rate of growth since its inception one year ago.Currently,its assets total $100,000.If growth continues at the current rate of 12 percent compounded quarterly,what will total assets be in 2¹/₂ years?

An increase in the discount rate used in computing the NPV of a project will lower the value of the NPV for that project.

All other factors held constant,the present value of a given annual annuity decreases as the number of discounting periods per year increases.

A $10,000 loan is to be amortized over 5 years,with annual end-of-year payments.Given the following facts,which of these statements is correct?

Using the discounted payback method,a project should be accepted when the discounted payback is greater than the project's expected life.

Suppose someone offered you your choice of two equally risky annuities,each paying $5,000 per year for 5 years.One is an annuity due,while the other is a regular (or deferred)annuity.If you are a rational wealth-maximizing investor which annuity would you choose?

You have just taken out a 30-year,$120,000 mortgage on your new home.This mortgage is to be repaid in 360 equal end-of-month installments.If each of the monthly installments is $1,500,what is the effective annual interest rate on this mortgage?

If $100 is placed in an account that earns a simple 4 percent,compounded quarterly,what will it be worth in 5 years?

Financial calculator and tabular methods use different mathematical formulas to solve time value of money problems,and that is why they always lead to different results.

An Overview of Finance

Financial Assets Instruments

Financial Markets and the Investment Banking Process

Financial Intermediaries and the Banking System

The Cost of Money Interest Rates

Business Organizations and the Tax Environment

Analysis of Financial Statements

Financial Planning and Control

Valuation Concepts

Risk and Rates of Return

The Cost of Capital

Capital Budgeting

Capital Structure and Dividend Policy Decisions

Working Capital Management

Investment and Securities

Investment Analysis and Valuation Techniques

Filters

Exam 9: Time Value of Money

The future value of a cash flow is positively related to interest rate and negatively related to the amount of time until maturity.

The post-audit two main purposes are to improve forecasts and to improve operations.

Suppose you put $100 into a savings account today,the account pays a simple annual interest rate of 6 percent,but compounded semiannually,and you withdraw $100 after 6 months.What would your ending balance be 20 years after the initial $100 deposit was made?

There exists an IRR solution for each time the direction of cash flows associated with a project is interrupted.

The opportunity cost rate is only applicable if you as an investor actually have an alternative investment to compare.If you are making a decision about a single investment,the opportunity rate concept does not apply.

The present value of a future cash flow is the amount of money if invested today at particular interest would turn into the future value at maturity.

Supposed someone offered you the choice of two equally risky annuities,each paying $10,000 per year for five years.One is an ordinary (or deferred)annuity,the other is an annuity due.Which of the following statements is most correct?

Drexel Corporation has been enjoying a phenomenal rate of growth since its inception one year ago.Currently,its assets total $100,000.If growth continues at the current rate of 12 percent compounded quarterly,what will total assets be in 21/2 years?

An increase in the discount rate used in computing the NPV of a project will lower the value of the NPV for that project.

All other factors held constant,the present value of a given annual annuity decreases as the number of discounting periods per year increases.

A $10,000 loan is to be amortized over 5 years,with annual end-of-year payments.Given the following facts,which of these statements is correct?

Using the discounted payback method,a project should be accepted when the discounted payback is greater than the project's expected life.

Suppose someone offered you your choice of two equally risky annuities,each paying $5,000 per year for 5 years.One is an annuity due,while the other is a regular (or deferred)annuity.If you are a rational wealth-maximizing investor which annuity would you choose?

You have just taken out a 30-year,$120,000 mortgage on your new home.This mortgage is to be repaid in 360 equal end-of-month installments.If each of the monthly installments is $1,500,what is the effective annual interest rate on this mortgage?

If $100 is placed in an account that earns a simple 4 percent,compounded quarterly,what will it be worth in 5 years?

Financial calculator and tabular methods use different mathematical formulas to solve time value of money problems,and that is why they always lead to different results.

An Overview of Finance

Financial Assets Instruments

Financial Markets and the Investment Banking Process

Financial Intermediaries and the Banking System

The Cost of Money Interest Rates

Business Organizations and the Tax Environment

Analysis of Financial Statements

Financial Planning and Control

Valuation Concepts

Risk and Rates of Return

The Cost of Capital

Capital Budgeting

Capital Structure and Dividend Policy Decisions

Working Capital Management

Investment and Securities

Investment Analysis and Valuation Techniques

Filters

Drexel Corporation has been enjoying a phenomenal rate of growth since its inception one year ago.Currently,its assets total $100,000.If growth continues at the current rate of 12 percent compounded quarterly,what will total assets be in 2¹/₂ years?