Exam 7: Time Value of Money Basics and Applications

You have accumulated $8,000 toward the down payment on a piece of lake front property in rural Minnesota.You wish to accumulate $12,000 for the down payment in four years.If you choose not to contribute more new funds to your down payment fund,what rate of return must your fund earn to reach your objective in the specified time? Assume that your investment fund compounds annually.

(Multiple Choice)

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Question 21

Common stockholders are subordinate to all other creditors in their payments.

(True/False)

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Question 22

Michael received a professional baseball contract paying $7,000,000 per year for 5 years,Bert received a two-year contract for $16,000,000 per year.For purposes of calculations,treat these contracts as ordinary annuities.Who's contract has a greater present value if we assume a discount rate of 6%?

(Multiple Choice)

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Question 23

You have decided to endow a Chair in Finance at Whatsamatta University.How much money must you deposit into the endowment account today if the Chair pays $125,000 per year (first payment one year from today),increases at a rate of 2% per year forever,and is invested at a rate that pays out 4.50% per year?

(Multiple Choice)

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Question 24

The maturity of an issue of preferred stock is:

(Multiple Choice)

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Question 25

Annuity A has a greater present value than annuity B when cash flows are discounted using the same positive interest rate for each annuity.Which annuity will have the larger future value if compounded at the same interest rate?

(Multiple Choice)

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Question 26

You have been accepted into a prestigious private university in Southern California - congratulations! Since no one from this school has ever graduated in only four years,you anticipate that you will need to make 10 semi-annual tuition payments of $25,000 each with the first cash flow six months from today.If you choose to discount these cash flows at an annual rate of 6%,what is the present value cost of tuition to attend your university of choice?

(Multiple Choice)

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Question 27

Epo Pharmaceuticals Inc.has an issue of preferred stock outstanding that has a required rate of return of 9% and pays $6 annual dividends.If the preferred share were issued 3 years ago,what is the current price per share?

(Multiple Choice)

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Question 28

If the discount rate used to compare the present value of two annuities is 0%,then the timing of the cash flows is unimportant in the present value calculation.

(True/False)

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Question 29

Individuals and businesses require compensation for delaying consumption.Which of the following questions may contribute to the magnitude of the compensation?

(Multiple Choice)

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Question 30

You are about to purchase a new car from a dealer who has a new and unusual payment plan.You have the choice to pay $28,000 cash today or $31,000 in four years.If you have the opportunity to borrow the cash price value of the car at a rate of 2.5% and repay the loan in a lump sum in 4 years,which option should you take and why?

(Multiple Choice)

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Question 31

What is the pecking order of payments (from first to last)for a firm's creditors and owners?

(Multiple Choice)

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Question 32

You have decided to endow a Chair in Finance at Whatsamatta University.How much money must you deposit into the endowment account today if the Chair pays $125,000 per year forever (first payment one year from today)and is invested at a rate that pays out 4.50% per year?

(Multiple Choice)

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Question 33

________ is the cost of a foregone alternative.

(Multiple Choice)

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Question 34

Skye Industries Inc.bonds currently have 14 years remaining to maturity.What is the yield to maturity of the firm's semi-annual bonds if they carry a face value of $1,000,an annual coupon rate of 8% and have a current price of $885.16?

(Multiple Choice)

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Question 35

Cascade Industries Inc.intends to pay a common stock dividend of $3.18 one year from today and the firm anticipates that the dividend will continue to grow at a rate of 2% per year indefinitely.If the firm has a 13% required rate of return,what is the current price per share of stock?

(Multiple Choice)

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Question 36

An unattractive feature of U.S.corporate bonds is that there is no secondary market and the investor is forced to hold the bond until maturity.

(True/False)

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Question 37

Eastinghome Inc.just paid $8,000 to a landowner to explore for but not extract valuable minerals.If the landowner invests the money at a rate of 5.5% compounded annually for 7 years what is the investment worth at the end of that time period?

(Multiple Choice)

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Question 38

What is the present value of a series of $5,000 end-of-the-year cash flows to be received forever if the required rate of return is 6.00% per year and the first cash flow is one year from today?

(Multiple Choice)

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Question 39

Zero coupon bonds sell at a steep premium to the face value.

(True/False)

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Question 40

Showing 21 - 40 of 77

Common stockholders are subordinate to all other creditors in their payments.

Michael received a professional baseball contract paying $7,000,000 per year for 5 years,Bert received a two-year contract for $16,000,000 per year.For purposes of calculations,treat these contracts as ordinary annuities.Who's contract has a greater present value if we assume a discount rate of 6%?

The maturity of an issue of preferred stock is:

Annuity A has a greater present value than annuity B when cash flows are discounted using the same positive interest rate for each annuity.Which annuity will have the larger future value if compounded at the same interest rate?

Epo Pharmaceuticals Inc.has an issue of preferred stock outstanding that has a required rate of return of 9% and pays $6 annual dividends.If the preferred share were issued 3 years ago,what is the current price per share?

If the discount rate used to compare the present value of two annuities is 0%,then the timing of the cash flows is unimportant in the present value calculation.

Individuals and businesses require compensation for delaying consumption.Which of the following questions may contribute to the magnitude of the compensation?

What is the pecking order of payments (from first to last)for a firm's creditors and owners?

You have decided to endow a Chair in Finance at Whatsamatta University.How much money must you deposit into the endowment account today if the Chair pays $125,000 per year forever (first payment one year from today)and is invested at a rate that pays out 4.50% per year?

________ is the cost of a foregone alternative.

Skye Industries Inc.bonds currently have 14 years remaining to maturity.What is the yield to maturity of the firm's semi-annual bonds if they carry a face value of $1,000,an annual coupon rate of 8% and have a current price of $885.16?

Cascade Industries Inc.intends to pay a common stock dividend of $3.18 one year from today and the firm anticipates that the dividend will continue to grow at a rate of 2% per year indefinitely.If the firm has a 13% required rate of return,what is the current price per share of stock?

An unattractive feature of U.S.corporate bonds is that there is no secondary market and the investor is forced to hold the bond until maturity.

Eastinghome Inc.just paid $8,000 to a landowner to explore for but not extract valuable minerals.If the landowner invests the money at a rate of 5.5% compounded annually for 7 years what is the investment worth at the end of that time period?

What is the present value of a series of $5,000 end-of-the-year cash flows to be received forever if the required rate of return is 6.00% per year and the first cash flow is one year from today?

Zero coupon bonds sell at a steep premium to the face value.

Overview of Financial Management

Sizing up a Business: a Non-Financial Perspective

Understanding Financial Statements

Measuring Financial Performance

Managing Day-To-Day Cash Flow

Projecting Financial Requirements and Managing Growth

Making Investment Decisions

Overview of Capital Markets: Long-Term Financing Instruments

Assessing the Cost of Capital: What Return Investors Require

Understanding Financing and Payout Decisions

Designing an Optimal Capital Structure

Measuring and Creating Value

Comprehensive Case Study: Wal-Mart Stores,inc

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