Question 1

What is the present value of a 5-year ordinary annuity with annual payments of $200,evaluated at a 15 percent interest rate?

Accepted Answer

A)  $670.43 
B)  $842.91 
C)  $1,169.56 
D)  $1,348.48 
E)  $1,522.64 
A)  $670.43 
B)  $842.91 
C)  $1,169.56 
D)  $1,348.48 
E)  $1,522.64

Question 2

Gomez Electronics needs to arrange financing for its expansion program.Bank A offers to lend Gomez the required funds on a loan where interest must be paid monthly,and the quoted rate is 8 percent.Bank B will charge 9 percent,with interest due at the end of the year.What is the difference in the effective annual rates charged by the two banks?

Accepted Answer

A)  0.25% 
B)  0.50% 
C)  0.70% 
D)  1.00% 
E)  1.25% 
A)  0.25% 
B)  0.50% 
C)  0.70% 
D)  1.00% 
E)  1.25%

Question 3

You can deposit your savings at the Darlington National Bank,which offers to pay 12.6 percent interest compounded monthly,or at the Bartlett Bank,which will pay interest of 11.5 percent compounded daily.(Assume 365 days in a year. )Which bank offers the higher effective annual rate?

Accepted Answer

A)  Darlington National Bank. 
B)  Bartlett Bank. 
C)  Both banks offer the same effective rate. 
D)  Cannot be determined from the information provided. 
E)  Workable only if the banks use the same compounding period. 
A)  Darlington National Bank. 
B)  Bartlett Bank. 
C)  Both banks offer the same effective rate. 
D)  Cannot be determined from the information provided. 
E)  Workable only if the banks use the same compounding period.

Question 4

Union Atlantic Corporation,which has a required rate of return equal to 14 percent,is evaluating a capital budgeting project that has the following characteristics:   Union Atlantic's capital budgeting manager has determined that the project's net present value is $7,008.According to this information,which of the following statements is correct?

Accepted Answer

A)  The project's internal rate of return (IRR)must be greater than 14 percent. 
B)  The project's discounted payback must be less that its economic life. 
C)  The project should be purchased by Union Atlantic. 
D)  All of these statements are correct. 
E)  None of these statements is correct. 
A)  The project's internal rate of return (IRR)must be greater than 14 percent. 
B)  The project's discounted payback must be less that its economic life. 
C)  The project should be purchased by Union Atlantic. 
D)  All of these statements are correct. 
E)  None of these statements is correct.

Question 5

We can think of inflation occurring over time as a type of discounting process where the present value of a sum today is diminished by reverse compounding over time.

Accepted Answer

A) True 
 B)False

Question 6

You just graduated,and you plan to work for 10 years and then to leave for the Australian "Outback" bush country.You figure you can save $1,000 a year for the first 5 years and $2,000 a year for the next 5 years.These savings cash flows will start one year from now.In addition,your family has just given you a $5,000 graduation gift.If you put the gift now,and your future savings when they start,into an account which pays 8 percent compounded annually,what will your financial "stake" be when you leave for Australia 10 years from now?

Accepted Answer

A)  $21,432 
B)  $28,393 
C)  $16,651 
D)  $31,148 
E)  $20,000 
A)  $21,432 
B)  $28,393 
C)  $16,651 
D)  $31,148 
E)  $20,000

Question 7

As the winning contestant in a television game show,you are considering the prizes to be awarded.You must indicate to the sponsor which of the following two choices you prefer,assuming you want to maximize your wealth.Assume it is now January 1,and there is no danger whatever that the sponsor won't pay off. (1)$1,000 now and another $1,000 at the beginning of each of the 11 subsequent months during the remainder of the year,to be deposited in an account paying 12 percent simple annual rate,but compounded monthly (to be left on deposit for the year).
(2)$12,750 at the end of the year.
Which one would you choose?

Accepted Answer

A)  Choice 1 
B)  Choice 2 
C)  Choice 1,if the payments were made at the end of the year. 
D)  The choice would depend on how soon you need the money. 
E)  Either one,since they have the same present value. 
A)  Choice 1 
B)  Choice 2 
C)  Choice 1,if the payments were made at the end of the year. 
D)  The choice would depend on how soon you need the money. 
E)  Either one,since they have the same present value.

Question 8

Assume that you just had a child,and you are now planning for her college education.You would like to make 43 equal payments over the next 21 years (the first payment to be made immediately,all other payments to be made at 6-month intervals,with the final payment to be made at her 21st birthday)so that you will be able to cover her expected expenses while in school.You expect to pay expenses on her 18th,19th,20th,and 21st birthdays.Assume that the current (time period 0)annual cost of college is $6,000,that you expect annual inflation to be 8 percent for the next 5 years,and then 5 percent thereafter.If you expect to be able to earn a return of 4 percent every 6 months on your investments (a simple rate of 8 percent with semiannual compounding),what will be the amount of each of the 43 payments?

Accepted Answer

A)  $705.86 
B)  $731.93 
C)  $692.15 
D)  $650.46 
E)  $785.72 
A)  $705.86 
B)  $731.93 
C)  $692.15 
D)  $650.46 
E)  $785.72

Question 9

Assume that you are graduating,that you plan to work for 4 years,and then to go to law school for 3 years.Right now,going to law school would require $17,000 per year (for tuition,books,living expenses,etc. ),but you expect this cost to rise by 8 percent per year in all future years.You now have $25,000 invested in an investment account which pays a simple annual rate of 9 percent,quarterly compounding,and you expect that rate of return to continue into the future.You want to maintain the same standard of living while in law school that $17,000 per year would currently provide.You plan to save and to make 4 equal payments (deposits)which will be added to your account at the end of each of the next 4 years;these new deposits will earn the same rate as your investment account currently earns.How large must each of the 4 payments be in order to permit you to make 3 withdrawals,at the beginning of each of your 3 years in law school? (Note: (1)The first payment is made a year from today and the last payment 4 years from today, (2)the first withdrawal is made 4 years from today,and (3)the withdrawals will not be of a constant amount. )

Accepted Answer

A)  $13,242.67 
B)  $6,562.13 
C)  $10,440.00 
D)  $7,153.56 
E)  $14,922.85 
A)  $13,242.67 
B)  $6,562.13 
C)  $10,440.00 
D)  $7,153.56 
E)  $14,922.85

Question 10

Assume you are to receive a 20-year annuity with annual payments of $50.The first payment will be received at the end of Year 1,and the last payment will be received at the end of Year 20.You will invest each payment in an account that pays 10 percent.What will be the value in your account at the end of Year 30?

Accepted Answer

A)  $6,354.81 
B)  $7,427.83 
C)  $7,922.33 
D)  $8,591.00 
E)  $6,752.46 
A)  $6,354.81 
B)  $7,427.83 
C)  $7,922.33 
D)  $8,591.00 
E)  $6,752.46

Question 11

A bank pays a quoted annual (simple)interest rate of 8 percent.However,it pays interest (compounds)daily using a 365-day year.What is the effective annual rate of return?

Accepted Answer

A)  7.86% 
B)  7.54% 
C)  8.57% 
D)  8.33% 
E)  9.21% 
A)  7.86% 
B)  7.54% 
C)  8.57% 
D)  8.33% 
E)  9.21%

Question 12

You expect to receive $1,000 at the end of each of the next 3 years.You will deposit these payments into an account which pays 10 percent compounded semiannually.What is the future value of these payments,that is,the value at the end of the third year?

Accepted Answer

A)  $3,000 
B)  $3,310 
C)  $3,318 
D)  $3,401 
E)  $3,438 
A)  $3,000 
B)  $3,310 
C)  $3,318 
D)  $3,401 
E)  $3,438

Question 13

The ____ involves comparing the actual results with those predicted by the project's sponsors and explaining why any differences occur.

Accepted Answer

A)  discounted payback 
B)  internal rate of return 
C)  post-audit 
D)  net present value 
E)  economic value added 
A)  discounted payback 
B)  internal rate of return 
C)  post-audit 
D)  net present value 
E)  economic value added

Question 14

The present value (t = 0)of the following cash flow stream is $5,979.04 when discounted at 12 percent annually.What is the value of the missing (t = 2)cash flow?

Accepted Answer

A)  $2,000 
B)  $2,391 
C)  $3,000 
D)  $3,391 
E)  $4,237 
A)  $2,000 
B)  $2,391 
C)  $3,000 
D)  $3,391 
E)  $4,237

Question 15

Bank A offers a 2-year certificate of deposit (CD)that pays 10 percent compounded annually.Bank B offers a 2-year CD that is compounded semi-annually.The CDs have identical risk.What is the stated,or simple,rate that Bank B would have to offer to make you indifferent between the two investments?

Accepted Answer

A)  9.67% 
B)  9.76% 
C)  9.83% 
D)  9.87% 
E)  9.93% 
A)  9.67% 
B)  9.76% 
C)  9.83% 
D)  9.87% 
E)  9.93%

Question 16

Disregarding risk,if money has time value,the future value of some amount of money always will be more than the amount originally invested,and the present value of some amount to be received in the future is always less than that future amount to be received.

Accepted Answer

A) True 
 B)False

Question 17

An investor is considering the purchase of 20 acres of land.An analysis indicates that if the land is used for cattle grazing,it will produce a cash flow of $1,000 per year indefinitely.If the investor requires a return of 10 percent on investments of this type,what is the most he or she should be willing to pay for the land?

Accepted Answer

A)  $1,000 
B)  $10,000 
C)  $100,000 
D)  $150,000 
E)  $1,000,000 
A)  $1,000 
B)  $10,000 
C)  $100,000 
D)  $150,000 
E)  $1,000,000

Question 18

If we calculate a periodic interest rate,say a monthly rate,in order to get the simple annual rate,we can multiply the periodic rate by the number of periods within a year.

Accepted Answer

A) True 
 B)False

Question 19

Your father,who is 60,plans to retire in 2 years,and he expects to live independently for 3 years.He wants a retirement income which has,in the first year,the same purchasing power as $40,000 has today.However,his retirement income will be of a fixed amount,so his real income will decline over time.His retirement income will start the day he retires,2 years from today,and he will receive a total of 3 retirement payments.Inflation is expected to be constant at 5 percent.Your father has $100,000 in savings now,and he can earn 8 percent on savings now and in the future.How much must he save each year,starting today,to meet his retirement goals?

Accepted Answer

A)  $1,863 
B)  $2,034 
C)  $2,716 
D)  $5,350 
E)  $6,102 
A)  $1,863 
B)  $2,034 
C)  $2,716 
D)  $5,350 
E)  $6,102

Question 20

A project with a 3-year life has the following probability distributions for possible end of year cash flows in each of the next three years:   Using an interest rate of 8 percent,find the expected present value of these uncertain cash flows.(Hint: Find the expected cash flow in each year,then evaluate those cash flows. )

Accepted Answer

A)  $1,204.95 
B)  $835.42 
C)  $1,519.21 
D)  $1,580.00 
E)  $1,347.61 
A)  $1,204.95 
B)  $835.42 
C)  $1,519.21 
D)  $1,580.00 
E)  $1,347.61

What is the present value of a 5-year ordinary annuity with annual payments of $200,evaluated at a 15 percent interest rate?

You can deposit your savings at the Darlington National Bank,which offers to pay 12.6 percent interest compounded monthly,or at the Bartlett Bank,which will pay interest of 11.5 percent compounded daily.(Assume 365 days in a year. )Which bank offers the higher effective annual rate?

We can think of inflation occurring over time as a type of discounting process where the present value of a sum today is diminished by reverse compounding over time.

A bank pays a quoted annual (simple)interest rate of 8 percent.However,it pays interest (compounds)daily using a 365-day year.What is the effective annual rate of return?

You expect to receive $1,000 at the end of each of the next 3 years.You will deposit these payments into an account which pays 10 percent compounded semiannually.What is the future value of these payments,that is,the value at the end of the third year?

The ____ involves comparing the actual results with those predicted by the project's sponsors and explaining why any differences occur.

The present value (t = 0)of the following cash flow stream is $5,979.04 when discounted at 12 percent annually.What is the value of the missing (t = 2)cash flow?

Bank A offers a 2-year certificate of deposit (CD)that pays 10 percent compounded annually.Bank B offers a 2-year CD that is compounded semi-annually.The CDs have identical risk.What is the stated,or simple,rate that Bank B would have to offer to make you indifferent between the two investments?

Disregarding risk,if money has time value,the future value of some amount of money always will be more than the amount originally invested,and the present value of some amount to be received in the future is always less than that future amount to be received.

If we calculate a periodic interest rate,say a monthly rate,in order to get the simple annual rate,we can multiply the periodic rate by the number of periods within a year.

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

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Exam 9: Time Value of Money

What is the present value of a 5-year ordinary annuity with annual payments of $200,evaluated at a 15 percent interest rate?

You can deposit your savings at the Darlington National Bank,which offers to pay 12.6 percent interest compounded monthly,or at the Bartlett Bank,which will pay interest of 11.5 percent compounded daily.(Assume 365 days in a year. )Which bank offers the higher effective annual rate?

We can think of inflation occurring over time as a type of discounting process where the present value of a sum today is diminished by reverse compounding over time.

A bank pays a quoted annual (simple)interest rate of 8 percent.However,it pays interest (compounds)daily using a 365-day year.What is the effective annual rate of return?

You expect to receive $1,000 at the end of each of the next 3 years.You will deposit these payments into an account which pays 10 percent compounded semiannually.What is the future value of these payments,that is,the value at the end of the third year?

The ____ involves comparing the actual results with those predicted by the project's sponsors and explaining why any differences occur.

The present value (t = 0)of the following cash flow stream is $5,979.04 when discounted at 12 percent annually.What is the value of the missing (t = 2)cash flow?

Bank A offers a 2-year certificate of deposit (CD)that pays 10 percent compounded annually.Bank B offers a 2-year CD that is compounded semi-annually.The CDs have identical risk.What is the stated,or simple,rate that Bank B would have to offer to make you indifferent between the two investments?

Disregarding risk,if money has time value,the future value of some amount of money always will be more than the amount originally invested,and the present value of some amount to be received in the future is always less than that future amount to be received.

If we calculate a periodic interest rate,say a monthly rate,in order to get the simple annual rate,we can multiply the periodic rate by the number of periods within a year.

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