Question 1

The rate of return,discount rate,hurdle rate,and opportunity cost of capital all have the same meaning.

Accepted Answer

A) True 
 B)False

Question 2

The net present value formula for one period is:

Accepted Answer

A) NPV = C0 + [C1/(1 + r)]. 
B) NPV = PV required investment. 
C) NPV = C0/C1. 
D) NPV = C1/C0. 
A) NPV = C0 + [C1/(1 + r)]. 
B) NPV = PV required investment. 
C) NPV = C0/C1. 
D) NPV = C1/C0.

Question 3

State the rate of return rule.

Accepted Answer

Invest as long as the rate of

Question 4

An initial investment of $500 produces a cash flow of $550 one year from today.Calculate the rate of return on the project.

Accepted Answer

A) 10% 
B) 15% 
C) 20% 
D) 25% 
A) 10% 
B) 15% 
C) 20% 
D) 25%

Question 5

You are considering investing in a retirement fund that requires you to deposit $5,000 per year,and you want to know how much the fund will be worth when you retire.What financial technique should you use to calculate this value?

Accepted Answer

A) Future value of a single payment 
B) Future value of an annuity 
C) Present value of an annuity 
D) Present value of a perpetuity 
A) Future value of a single payment 
B) Future value of an annuity 
C) Present value of an annuity 
D) Present value of a perpetuity

Question 6

The one-year discount factor,at an interest rate of 100% per year,is:

Accepted Answer

A) 1.50. 
B) 0.50. 
C) 0.25. 
D) 1.00. 
A) 1.50. 
B) 0.50. 
C) 0.25. 
D) 1.00.

Question 7

Which of the following is generally considered an example of a perpetuity?

Accepted Answer

A) Interest payments on a 10-year bond 
B) Interest payments on a 30-year bond 
C) Interest payments on a consol 
D) Interest payments on government bonds 
A) Interest payments on a 10-year bond 
B) Interest payments on a 30-year bond 
C) Interest payments on a consol 
D) Interest payments on government bonds

Question 8

The managers of a firm can maximize stockholder wealth by:

Accepted Answer

A) taking all projects with positive NPVs. 
B) taking all projects with NPVs greater than the cost of investment. 
C) taking all projects with NPVs greater than the present value of cash flows. 
D) taking only the highest NPV project each year. 
A) taking all projects with positive NPVs. 
B) taking all projects with NPVs greater than the cost of investment. 
C) taking all projects with NPVs greater than the present value of cash flows. 
D) taking only the highest NPV project each year.

Question 9

At an interest rate of 10%,which of the following sequences of cash flows should you prefer? $$\begin{array}{l}
\begin{array} { c c c c } 
& \text { Year l } & \text { Year 2 } & \text { Year } 3 \
\text { A) } & 500 & 300 & 100 \
\text { B) } & 100 & 300 & 500 \
\text { C) } & 300 & 300 & 300
\end{array}\
\text { D) Any of the above as they all add up to } \$ 900
\end{array}$$

Accepted Answer

A) option A 
B) option B 
C) option C 
D) option D 
A) option A 
B) option B 
C) option C 
D) option D

Question 10

If the present value annuity factor at 10% for 10 years is 6.1446,what is the equivalent future value annuity factor?

Accepted Answer

A) 3.1080 
B) 15.9375 
C) 2.5937 
D) 8.4132 
A) 3.1080 
B) 15.9375 
C) 2.5937 
D) 8.4132

Question 11

If you invest $100 at 12% APR for three years,how much would you have at the end of three years using compound interest?

Accepted Answer

A) $136 
B) $140.49 
C) $240.18 
D) $173.18 
A) $136 
B) $140.49 
C) $240.18 
D) $173.18

Question 12

The calculation of compound interest assumes reinvestment of interest payments at the given rate of return.

Accepted Answer

A) True 
 B)False

Question 13

You would like to have enough money saved to receive an $80,000 per year perpetuity after retirement.How much would you need to have saved in your retirement fund to achieve this goal? (Assume that the perpetuity payments start on the day of your retirement.The annual interest rate is 10%.)

Accepted Answer

A) $1,500,000 
B) $880,000 
C) $800,000 
D) $80,000 
A) $1,500,000 
B) $880,000 
C) $800,000 
D) $80,000

Question 14

If the present value of a cash flow generated by an initial investment of $200,000 is $250,000,what is the NPV of the project?

Accepted Answer

A) $250,000 
B) $50,000 
C) $200,000 
D) -$50,000 
A) $250,000 
B) $50,000 
C) $200,000 
D) -$50,000

Question 15

The present value of $100.00 expected two years from today at a discount rate of 6% is:

Accepted Answer

A) $112.36. 
B) $106.00. 
C) $100.00. 
D) $89.00. 
A) $112.36. 
B) $106.00. 
C) $100.00. 
D) $89.00.

Question 16

Which of the following statements is true?

Accepted Answer

A) The process of discounting is the inverse of the process of compounding. 
B) Ending balances using simple interest are always greater than ending balances using compound interest at positive interest rates. 
C) The present value of an annuity due is always less than the present value of an equivalent ordinary annuity at positive interest rates. 
D) The future value of an annuity due is always less than the present value of an equivalent ordinary annuity at positive interest rates. 
A) The process of discounting is the inverse of the process of compounding. 
B) Ending balances using simple interest are always greater than ending balances using compound interest at positive interest rates. 
C) The present value of an annuity due is always less than the present value of an equivalent ordinary annuity at positive interest rates. 
D) The future value of an annuity due is always less than the present value of an equivalent ordinary annuity at positive interest rates.

Question 17

If the future value annuity factor at 10% and five years is 6.1051,calculate the equivalent present value annuity factor:

Accepted Answer

A) 6.1051 
B) 3.7908 
C) 6.7156 
D) 4.8127 
A) 6.1051 
B) 3.7908 
C) 6.7156 
D) 4.8127

Question 18

The concept of compound interest is best described as:

Accepted Answer

A) interest earned on an investment. 
B) the total amount of interest earned over the life of an investment. 
C) interest earned on interest. 
D) the inverse of simple interest. 
A) interest earned on an investment. 
B) the total amount of interest earned over the life of an investment. 
C) interest earned on interest. 
D) the inverse of simple interest.

Question 19

An investment at 12% APR compounded monthly is equal to an effective annual rate of:

Accepted Answer

A) 12.68% 
B) 12.36% 
C) 12.00% 
D) 11.87% 
A) 12.68% 
B) 12.36% 
C) 12.00% 
D) 11.87%

Question 20

Ms.Colonial has just taken out a $150,000 mortgage at an interest rate of 6% per year.If the mortgage calls for equal monthly payments for 20 years,what is the amount of each payment? (Assume monthly compounding or discounting.)

Accepted Answer

A) $1,254.70 
B) $1,625.00 
C) $1,263.06 
D) $1,074.65 
A) $1,254.70 
B) $1,625.00 
C) $1,263.06 
D) $1,074.65

Exam 2: How to Calculate Present Values

The rate of return,discount rate,hurdle rate,and opportunity cost of capital all have the same meaning.

The net present value formula for one period is:

State the rate of return rule.

An initial investment of $500 produces a cash flow of $550 one year from today.Calculate the rate of return on the project.

You are considering investing in a retirement fund that requires you to deposit $5,000 per year,and you want to know how much the fund will be worth when you retire.What financial technique should you use to calculate this value?

The one-year discount factor,at an interest rate of 100% per year,is:

Which of the following is generally considered an example of a perpetuity?

The managers of a firm can maximize stockholder wealth by:

At an interest rate of 10%,which of the following sequences of cash flows should you prefer? Year l Year 2 Year 3 A) 500 300 100 B) 100 300 500 C) 300 300 300 D) Any of the above as they all add up to \ 900

If the present value annuity factor at 10% for 10 years is 6.1446,what is the equivalent future value annuity factor?

If you invest $100 at 12% APR for three years,how much would you have at the end of three years using compound interest?

The calculation of compound interest assumes reinvestment of interest payments at the given rate of return.

You would like to have enough money saved to receive an $80,000 per year perpetuity after retirement.How much would you need to have saved in your retirement fund to achieve this goal? (Assume that the perpetuity payments start on the day of your retirement.The annual interest rate is 10%.)

If the present value of a cash flow generated by an initial investment of $200,000 is $250,000,what is the NPV of the project?

The present value of $100.00 expected two years from today at a discount rate of 6% is:

Which of the following statements is true?

If the future value annuity factor at 10% and five years is 6.1051,calculate the equivalent present value annuity factor:

The concept of compound interest is best described as:

An investment at 12% APR compounded monthly is equal to an effective annual rate of:

Ms.Colonial has just taken out a $150,000 mortgage at an interest rate of 6% per year.If the mortgage calls for equal monthly payments for 20 years,what is the amount of each payment? (Assume monthly compounding or discounting.)

Introduction to Corporate Finance

Valuing Bonds

The Value of Common Stocks

Net Present Value and Other Investment Criteria

Making Investment Decisions With the Net Present Value Rule

Introduction to Risk and Return

Portfolio Theory and the Capital Asset Pricing Model

Risk and the Cost of Capital

Project Analysis

Investment, Strategy, and Economic Rents

Agency Problems, Compensation, and Performance Measurement

Efficient Markets and Behavioral Finance

An Overview of Corporate Financing

How Corporations Issue Securities

Payout Policy

Does Debt Policy Matter

How Much Should a Corporation Borrow

Financing and Valuation

Understanding Options

Valuing Options

Real Options

Credit Risk and the Value of Corporate Debt

The Many Different Kinds of Debt

Leasing

Managing Risk

Managing International Risks

Financial Analysis

Financial Planning

Working Capital Management

Mergers

Corporate Restructuring

Governance and Corporate Control Around the World

Filters