Question 1

The rate of return on any perpetuity is equal to its cash flow multiplied by its price.

Accepted Answer

A) True 
 B)False

Question 2

For $10,000, you can purchase a five-year annuity that will pay $2,358.65 per year for five years.The payments occur at the beginning of each year.Calculate the effective annual interest rate implied by this arrangement.

Accepted Answer

A) 8 percent 
B) 9 percent 
C) 10 percent 
D) 11 percent 
A) 8 percent 
B) 9 percent 
C) 10 percent 
D) 11 percent

Question 3

If the present value of $480 to be paid at the end of one year is $400, what is the one-year discount factor?

Accepted Answer

A) 0.8333 
B) 1.20 
C) 0.20 
D) 1.00 
A) 0.8333 
B) 1.20 
C) 0.20 
D) 1.00

Question 4

If the annual interest rate is 12 percent, what is the two-year discount factor?

Accepted Answer

A) 0.7972 
B) 0.8929 
C) 1.2544 
D) 0.8065 
A) 0.7972 
B) 0.8929 
C) 1.2544 
D) 0.8065

Question 5

State the rate of return rule.

Accepted Answer

Invest as long as the rate of

Question 6

Which of the following statements regarding the NPV rule and the rate of return rule is false?

Accepted Answer

A) Accept a project if its NPV > 0. 
B) Reject a project if the NPV  0. 
D) Accept a project if its rate of return > opportunity cost of capital. 
A) Accept a project if its NPV > 0. 
B) Reject a project if the NPV  0. 
D) Accept a project if its rate of return > opportunity cost of capital.

Question 7

An investment having a 10.47 percent effective annual rate (EAR) has what APR? (Assume monthly compounding.)

Accepted Answer

A) 10.99 percent 
B) 9.57 percent 
C) 10.00 percent 
D) 8.87 percent 
A) 10.99 percent 
B) 9.57 percent 
C) 10.00 percent 
D) 8.87 percent

Question 8

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 percent.)

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 9

The opportunity cost of capital for a risky project is

Accepted Answer

A) the expected rate of return on a government security having the same maturity as the project. 
B) the expected rate of return on a well-diversified portfolio of common stocks. 
C) the expected rate of return on a security of similar risk as the project. 
D) the expected rate of return on a typical bond portfolio. 
A) the expected rate of return on a government security having the same maturity as the project. 
B) the expected rate of return on a well-diversified portfolio of common stocks. 
C) the expected rate of return on a security of similar risk as the project. 
D) the expected rate of return on a typical bond portfolio.

Question 10

Mr.Hopper expects to retire in 25 years, and he wishes to accumulate $750,000 in his retirement fund by that time.If the interest rate is 10 percent per year, how much should Mr.Hopper put into his retirement fund each year in order to achieve this goal? (Assume that he makes payments at the end of each year.)

Accepted Answer

A) $4,559.44 
B) $2,500 
C) $7,626.05 
D) $8,418.29 
A) $4,559.44 
B) $2,500 
C) $7,626.05 
D) $8,418.29

Question 11

For $10,000, you can purchase a five-year annuity that will pay $2,504.57 per year for five years.The payments occur at the end of each year.Calculate the effective annual interest rate implied by this arrangement.

Accepted Answer

A) 8 percent 
B) 9 percent 
C) 10 percent 
D) 11 percent 
A) 8 percent 
B) 9 percent 
C) 10 percent 
D) 11 percent

Question 12

You just inherited a trust that will pay you $100,000 per year in perpetuity.However, the first payment will not occur for exactly five more years.Assuming an 8 percent annual interest rate, what is the value of this trust?

Accepted Answer

A) $850,729 
B) $918,787 
C) $1,000,000 
D) $1,250,000 
A) $850,729 
B) $918,787 
C) $1,000,000 
D) $1,250,000

Question 13

If you are paid $1,000 at the end of each year for the next five years, what type of cash flow did you receive?

Accepted Answer

A) Uneven cash flow stream 
B) An annuity 
C) An annuity due 
D) A perpetuity 
A) Uneven cash flow stream 
B) An annuity 
C) An annuity due 
D) A perpetuity

Question 14

You just inherited a trust that will pay you $100,000 per year in perpetuity.However, the first payment will not occur for exactly four more years.Assuming an 8 percent annual interest rate, what is the value of this trust?

Accepted Answer

A) $918,787 
B) $992,290 
C) $1,000,000 
D) $1,250,000 
A) $918,787 
B) $992,290 
C) $1,000,000 
D) $1,250,000

Question 15

If the three-year present value annuity factor is 2.673 and the two-year present value annuity factor is 1.833, what is the present value of $1 received at the end of the three years?

Accepted Answer

A) $1.19 
B) $0.84 
C) $0.89 
D) $0.92 
A) $1.19 
B) $0.84 
C) $0.89 
D) $0.92

Question 16

An annuity is defined as a set of

Accepted Answer

A) equal cash flows occurring at equal intervals of time for a specified period. 
B) equal cash flows occurring at equal intervals of time forever. 
C) unequal cash flows occurring at equal intervals of time forever. 
D) unequal cash flows occurring at equal intervals of time for a specified period. 
A) equal cash flows occurring at equal intervals of time for a specified period. 
B) equal cash flows occurring at equal intervals of time forever. 
C) unequal cash flows occurring at equal intervals of time forever. 
D) unequal cash flows occurring at equal intervals of time for a specified period.

Question 17

"Accept investments that have positive net present values" is called the net present value rule.

Accepted Answer

A) True 
 B)False

Question 18

A dollar today is worth more than a dollar tomorrow if the interest rate is positive.

Accepted Answer

A) True 
 B)False

Question 19

What is the net present value of the following cash flow sequence at a discount rate of 11 percent? $\frac { \underline { \mathrm { t } = 0 } } { - 120.000 } \quad \frac { \mathrm { t } = 1 } { 00.000 } \quad \frac { \underline { \mathrm { t } = 2
 } }{ - 100.000 }$

Accepted Answer

A) $69,108.03 
B) $231,432.51 
C) $80,000.00 
D) $88,000.00 
A) $69,108.03 
B) $231,432.51 
C) $80,000.00 
D) $88,000.00

Question 20

The present value formula for a cash flow expected one period from now is

Accepted Answer

A) PV = C1× (1 + r). 
B) PV = C1/(1 + r). 
C) PV = C1/r. 
D) PV = (1 + r)/C1. 
A) PV = C1× (1 + r). 
B) PV = C1/(1 + r). 
C) PV = C1/r. 
D) PV = (1 + r)/C1.

Exam 2: How to Calculate Present Values

The rate of return on any perpetuity is equal to its cash flow multiplied by its price.

For $10,000, you can purchase a five-year annuity that will pay $2,358.65 per year for five years.The payments occur at the beginning of each year.Calculate the effective annual interest rate implied by this arrangement.

If the present value of $480 to be paid at the end of one year is $400, what is the one-year discount factor?

If the annual interest rate is 12 percent, what is the two-year discount factor?

State the rate of return rule.

Which of the following statements regarding the NPV rule and the rate of return rule is false?

An investment having a 10.47 percent effective annual rate (EAR) has what APR? (Assume monthly compounding.)

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 percent.)

The opportunity cost of capital for a risky project is

For $10,000, you can purchase a five-year annuity that will pay $2,504.57 per year for five years.The payments occur at the end of each year.Calculate the effective annual interest rate implied by this arrangement.

You just inherited a trust that will pay you $100,000 per year in perpetuity.However, the first payment will not occur for exactly five more years.Assuming an 8 percent annual interest rate, what is the value of this trust?

If you are paid $1,000 at the end of each year for the next five years, what type of cash flow did you receive?

You just inherited a trust that will pay you $100,000 per year in perpetuity.However, the first payment will not occur for exactly four more years.Assuming an 8 percent annual interest rate, what is the value of this trust?

If the three-year present value annuity factor is 2.673 and the two-year present value annuity factor is 1.833, what is the present value of $1 received at the end of the three years?

An annuity is defined as a set of

"Accept investments that have positive net present values" is called the net present value rule.

A dollar today is worth more than a dollar tomorrow if the interest rate is positive.

The present value formula for a cash flow expected one period from now is

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 Risk

Financial Analysis

Financial Planning

Working Capital Management

Mergers

Corporate Restructuring

Governance and Corporate Control Around the World

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