Question 1

Your investment account pays 8.0%,compounded annually.If you invest $5,000 today,how many years will it take for your investment to grow to $9,140.20?

Accepted Answer

A) 5.14 
B) 5.71 
C) 6.35 
D) 7.05 
E) 7.84 
A) 5.14 
B) 5.71 
C) 6.35 
D) 7.05 
E) 7.84

Question 2

Which of the following statements is CORRECT?

Accepted Answer

A) If CF0 is positive and all the other CFs are negative, then you can still solve for I. 
B) If you have a series of cash flows, each of which is positive, you can solve for I, where the solution value of I causes the PV of the cash flows to equal the cash flow at Time 0. 
C) If you have a series of cash flows, and CF0 is negative but each of the following CFs is positive, you can solve for I, but only if the sum of the undiscounted cash flows exceeds the cost. 
D) To solve for I, one must identify the value of I that causes the PV of the positive CFs to equal the absolute value of the FV of the negative CFs. It is impossible to find the value of I without a computer or financial calculator. 
E) If you solve for I and get a negative number, then you must have made a mistake. 
A) If CF0 is positive and all the other CFs are negative, then you can still solve for I. 
B) If you have a series of cash flows, each of which is positive, you can solve for I, where the solution value of I causes the PV of the cash flows to equal the cash flow at Time 0. 
C) If you have a series of cash flows, and CF0 is negative but each of the following CFs is positive, you can solve for I, but only if the sum of the undiscounted cash flows exceeds the cost. 
D) To solve for I, one must identify the value of I that causes the PV of the positive CFs to equal the absolute value of the FV of the negative CFs. It is impossible to find the value of I without a computer or financial calculator. 
E) If you solve for I and get a negative number, then you must have made a mistake.

Question 3

Which of the following statements is CORRECT?

Accepted Answer

A) An investment that has a nominal rate of 6% with semiannual payments will have an effective rate that is smaller than 6%. 
B) The present value of a 3-year, $150 annuity due will exceed the present value of a 3-year, $150 ordinary annuity. 
C) If a loan has a nominal annual rate of 8%, then the effective rate can never be greater than 8%. 
D) If a loan or investment has annual payments, then the effective, periodic, and nominal rates of interest will all be different. 
E) The proportion of the payment that goes toward interest on a fully amortized loan increases over time. 
A) An investment that has a nominal rate of 6% with semiannual payments will have an effective rate that is smaller than 6%. 
B) The present value of a 3-year, $150 annuity due will exceed the present value of a 3-year, $150 ordinary annuity. 
C) If a loan has a nominal annual rate of 8%, then the effective rate can never be greater than 8%. 
D) If a loan or investment has annual payments, then the effective, periodic, and nominal rates of interest will all be different. 
E) The proportion of the payment that goes toward interest on a fully amortized loan increases over time.

Question 4

Midway through the life of an amortized loan,the percentage of the payment that represents interest could be equal to,less than,or greater than to the percentage that represents repayment of principal.The proportions depend on the original life of the loan and the interest rate.

Accepted Answer

A) True 
 B)False

Question 5

Your girlfriend just won the Florida lottery.She has the choice of $15,000,000 today or a 20-year annuity of $1,050,000,with the first payment coming one year from today.What rate of return is built into the annuity?

Accepted Answer

A) 3.44% 
B) 3.79% 
C) 4.17% 
D) 4.58% 
E) 5.04% 
A) 3.44% 
B) 3.79% 
C) 4.17% 
D) 4.58% 
E) 5.04%

Question 6

A salt mine you inherited will pay you $25,000 per year for 25 years,with the first payment being made today.If you think a fair return on the mine is 7.5%,how much should you ask for it if you decide to sell it?

Accepted Answer

A) $284,595 
B) $299,574 
C) $314,553 
D) $330,281 
E) $346,795 
A) $284,595 
B) $299,574 
C) $314,553 
D) $330,281 
E) $346,795

Question 7

You sold your motorcycle and accepted a note with the following cash flow stream as your payment.What was the effective price you received for the car assuming an interest rate of 6.0%?

Accepted Answer

A) $5,987 
B) $6,286 
C) $6,600 
D) $6,930 
E) $7,277 
A) $5,987 
B) $6,286 
C) $6,600 
D) $6,930 
E) $7,277

Question 8

Which of the following statements is CORRECT?

Accepted Answer

A) Some of the cash flows shown on a time line can be in the form of annuity payments, but none can be uneven amounts. 
B) A time line is not meaningful unless all cash flows occur annually. 
C) Time lines are useful for visualizing complex problems prior to doing actual calculations. 
D) Time lines cannot be constructed in situations where some of the cash flows occur annually but others occur quarterly. 
E) Time lines cannot be constructed for annuities where the payments occur at the beginning of the periods. 
A) Some of the cash flows shown on a time line can be in the form of annuity payments, but none can be uneven amounts. 
B) A time line is not meaningful unless all cash flows occur annually. 
C) Time lines are useful for visualizing complex problems prior to doing actual calculations. 
D) Time lines cannot be constructed in situations where some of the cash flows occur annually but others occur quarterly. 
E) Time lines cannot be constructed for annuities where the payments occur at the beginning of the periods.

Question 9

What's the future value of $1,500 after 5 years if the appropriate interest rate is 6%,compounded semiannually?

Accepted Answer

A) $1,819 
B) $1,915 
C) $2,016 
D) $2,117 
E) $2,223 
A) $1,819 
B) $1,915 
C) $2,016 
D) $2,117 
E) $2,223

Question 10

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

Accepted Answer

A) True 
 B)False

Question 11

You plan to borrow $35,000 at a 7.5% annual interest rate.The terms require you to amortize the loan with 7 equal end-of-year payments.How much interest would you be paying in Year 2?

Accepted Answer

A) $1,994.49 
B) $2,099.46 
C) $2,209.96 
D) $2,326.27 
E) $2,442.59 
A) $1,994.49 
B) $2,099.46 
C) $2,209.96 
D) $2,326.27 
E) $2,442.59

Question 12

Which of the following statements is CORRECT,assuming positive interest rates and holding other things constant?

Accepted Answer

A) Banks A and B offer the same nominal annual rate of interest, but A pays interest quarterly and B pays semiannually. Deposits in Bank B will provide the higher future value if you leave your funds on deposit. 
B) The present value of a 5-year, $250 annuity due will be lower than the PV of a similar ordinary annuity. 
C) A 30-year, $150,000 amortized mortgage will have larger monthly payments than an otherwise similar 20-year mortgage. 
D) A bank loan's nominal interest rate will always be equal to or greater than its effective annual rate. 
E) If an investment pays 10% interest, compounded quarterly, its effective annual rate will be greater than 10%. 
A) Banks A and B offer the same nominal annual rate of interest, but A pays interest quarterly and B pays semiannually. Deposits in Bank B will provide the higher future value if you leave your funds on deposit. 
B) The present value of a 5-year, $250 annuity due will be lower than the PV of a similar ordinary annuity. 
C) A 30-year, $150,000 amortized mortgage will have larger monthly payments than an otherwise similar 20-year mortgage. 
D) A bank loan's nominal interest rate will always be equal to or greater than its effective annual rate. 
E) If an investment pays 10% interest, compounded quarterly, its effective annual rate will be greater than 10%.

Question 13

Your investment advisor has recommended your invest in bonds that pay 6.0%,compounded annually.If you invest $10,000 today,how many years will it take for your investment to grow to $30,000?

Accepted Answer

A) 12.37 
B) 13.74 
C) 15.27 
D) 16.97 
E) 18.85 
A) 12.37 
B) 13.74 
C) 15.27 
D) 16.97 
E) 18.85

Question 14

You are in negotiations to make a 7-year loan of $25,000 to DeVille Corporation.To repay you,DeVille will pay $2,500 at the end of Year 1,$5,000 at the end of Year 2,and $7,500 at the end of Year 3,plus a fixed but currently unspecified cash flow,X,at the end of each year from Year 4 through Year 7.You are confident the payments will be made,since DeVille is essentially riskless.You regard 8% as an appropriate rate of return on a low risk but illiquid 7-year loan.What cash flow must the investment provide at the end of each of the final 4 years,that is,what is X?

Accepted Answer

A) $4,271.67 
B) $4,496.49 
C) $4,733.15 
D) $4,969.81 
E) $5,218.30 
A) $4,271.67 
B) $4,496.49 
C) $4,733.15 
D) $4,969.81 
E) $5,218.30

Question 15

Suppose you just won the state lottery,and you have a choice between receiving $2,550,000 today or a 20-year annuity of $250,000,with the first payment coming one year from today.What rate of return is built into the annuity? Disregard taxes.

Accepted Answer

A) 7.12% 
B) 7.49% 
C) 7.87% 
D) 8.26% 
E) 8.67% 
A) 7.12% 
B) 7.49% 
C) 7.87% 
D) 8.26% 
E) 8.67%

Question 16

Ten years ago,Kronan Corporation earned $0.50 per share.Its earnings this year were $2.20.What was the growth rate in earnings per share (EPS)over the 10-year period?

Accepted Answer

A) 15.17% 
B) 15.97% 
C) 16.77% 
D) 17.61% 
E) 18.49% 
A) 15.17% 
B) 15.97% 
C) 16.77% 
D) 17.61% 
E) 18.49%

Question 17

Starting to invest early for retirement increases the benefits of compound interest.

Accepted Answer

A) True 
 B)False

Question 18

You are considering investing in a bank account that pays a nominal annual rate of 7%,compounded monthly.If you invest $3,000 at the end of each month,how many months will it take for your account to grow to $150,000?

Accepted Answer

A) 39.60 
B) 44.00 
C) 48.40 
D) 53.24 
E) 58.57 
A) 39.60 
B) 44.00 
C) 48.40 
D) 53.24 
E) 58.57

Question 19

Your bank offers to lend you $100,000 at an 8.5% annual interest rate to start your new business.The terms require you to amortize the loan with 10 equal end-of-year payments.How much interest would you be paying in Year 2?

Accepted Answer

A) $7,531 
B) $7,927 
C) $8,323 
D) $8,740 
E) $9,177 
A) $7,531 
B) $7,927 
C) $8,323 
D) $8,740 
E) $9,177

Question 20

Assume that you own an annuity that will pay you $15,000 per year for 12 years,with the first payment being made today.You need money today to open a new restaurant,and your uncle offers to give you $120,000 for the annuity.If you sell it,what rate of return would your uncle earn on his investment?

Accepted Answer

A) 6.85% 
B) 7.21% 
C) 7.59% 
D) 7.99% 
E) 8.41% 
A) 6.85% 
B) 7.21% 
C) 7.59% 
D) 7.99% 
E) 8.41%

Exam 28: Time Value of Money

Your investment account pays 8.0%,compounded annually.If you invest $5,000 today,how many years will it take for your investment to grow to $9,140.20?

Which of the following statements is CORRECT?

Which of the following statements is CORRECT?

Midway through the life of an amortized loan,the percentage of the payment that represents interest could be equal to,less than,or greater than to the percentage that represents repayment of principal.The proportions depend on the original life of the loan and the interest rate.

Your girlfriend just won the Florida lottery.She has the choice of $15,000,000 today or a 20-year annuity of $1,050,000,with the first payment coming one year from today.What rate of return is built into the annuity?

A salt mine you inherited will pay you $25,000 per year for 25 years,with the first payment being made today.If you think a fair return on the mine is 7.5%,how much should you ask for it if you decide to sell it?

You sold your motorcycle and accepted a note with the following cash flow stream as your payment.What was the effective price you received for the car assuming an interest rate of 6.0%?

Which of the following statements is CORRECT?

What's the future value of $1,500 after 5 years if the appropriate interest rate is 6%,compounded semiannually?

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

You plan to borrow $35,000 at a 7.5% annual interest rate.The terms require you to amortize the loan with 7 equal end-of-year payments.How much interest would you be paying in Year 2?

Which of the following statements is CORRECT,assuming positive interest rates and holding other things constant?

Your investment advisor has recommended your invest in bonds that pay 6.0%,compounded annually.If you invest $10,000 today,how many years will it take for your investment to grow to $30,000?

Suppose you just won the state lottery,and you have a choice between receiving $2,550,000 today or a 20-year annuity of $250,000,with the first payment coming one year from today.What rate of return is built into the annuity? Disregard taxes.

Ten years ago,Kronan Corporation earned $0.50 per share.Its earnings this year were $2.20.What was the growth rate in earnings per share (EPS)over the 10-year period?

Starting to invest early for retirement increases the benefits of compound interest.

You are considering investing in a bank account that pays a nominal annual rate of 7%,compounded monthly.If you invest $3,000 at the end of each month,how many months will it take for your account to grow to $150,000?

Your bank offers to lend you $100,000 at an 8.5% annual interest rate to start your new business.The terms require you to amortize the loan with 10 equal end-of-year payments.How much interest would you be paying in Year 2?

Assume that you own an annuity that will pay you $15,000 per year for 12 years,with the first payment being made today.You need money today to open a new restaurant,and your uncle offers to give you $120,000 for the annuity.If you sell it,what rate of return would your uncle earn on his investment?

An Overview of Financial Management and the Financial Environment

Risk and Return: Part I

Risk and Return: Part Ii

Bond Valuation

Financial Options

Accounting for Financial Management

Analysis of Financial Statements

Basic Stock Valuation

Corporate Valuation and Financial Planning

Corporate Governance

Determining the Cost of Capital

Capital Budgeting: Decision Rules

Cash Flow Estimation and Risk Analysis

Real Options

Distributions to Shareholders: Dividends and Repurchases

Capital Structure Decisions

Dynamic Capital Structures and Corporate Valuation

Initial Public Offerings, investment Banking, and Financial Restructuring

Lease Financing

Hybrid Financing: Preferred Stock, Warrants, and Convertibles

Supply Chains and Working Capital Management

Providing and Obtaining Credit

Advanced Issues in Cash Management and Inventory Control

Enterprise Risk Management

Bankruptcy, reorganization, and Liquidation

Mergers and Corporate Control

Multinational Financial Management

Basic Financial Tools: a Review

Pension Plan Management

Financial Management in Not-For-Profit Businesses

a Values of the Areas Under the Standard Normal

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