Question 1

Consider the following timeline:   If the current market rate of interest is 12%,then the net present value of the cash flows is closest to:

Accepted Answer

A)  $20.6678 
B)  $320.6678 
C)  -$20.6678 
D)  $70.00 
A)  $20.6678 
B)  $320.6678 
C)  -$20.6678 
D)  $70.00 A

Question 2

Use the figure for the question(s) below.  
-Which of the following statements regarding the timeline is false?

Accepted Answer

A)  Date 1 is the end of the first year. 
B)  Date 0 is the beginning of the first year. 
C)  The space between date 0 and date 1 represents the time period between two specific dates. 
D)  You will find the timeline most useful in tracking cash flows if you interpret each point on the timeline as a period or interval of time. 
A)  Date 1 is the end of the first year. 
B)  Date 0 is the beginning of the first year. 
C)  The space between date 0 and date 1 represents the time period between two specific dates. 
D)  You will find the timeline most useful in tracking cash flows if you interpret each point on the timeline as a period or interval of time. D

Question 3

Use the information for the question(s) below.
Suppose that a young couple has just had their first baby and they wish to ensure that enough money will be available to pay for their child's college education. Currently college tuition, books, fees, and other costs average $12,500 per year. On average, tuition and other costs have historically increased at a rate of 4% per year.
-Consider a growing perpetuity that will pay $100 in one year.Each year after that,you will receive a payment on the anniversary of the last payment that is 6% larger than the last payment.This pattern of payments will continue forever.If the interest rate is 11%,then the value of this perpetuity is closest to:

Accepted Answer

A)  $1,667 
B)  $588 
C)  $2,000 
D)  $909 
A)  $1,667 
B)  $588 
C)  $2,000 
D)  $909 C

Question 4

Use the information for the question(s) below.
Suppose that a young couple has just had their first baby and they wish to ensure that enough money will be available to pay for their child's college education. Currently college tuition, books, fees, and other costs average $12,500 per year. On average, tuition and other costs have historically increased at a rate of 4% per year.
-Suppose that a young couple has just had their first baby and they wish to insure that enough money will be available to pay for their child's college education.They decide to make deposits into an educational savings account on each of their daughter's birthdays,starting with her first birthday.Assume that the educational savings account will return a constant 7%.The parents deposit $2000 on their daughter's first birthday and plan to increase the size of their deposits by 5% each year.Draw a timeline that details the amount that would be available for the daughter's college expenses on her 18th birthday.

Accepted Answer

The answer of Use the information for the question(s) below.
Suppose...

Question 5

Use the information for the question(s) below.
Assume that you are 30 years old today, and that you are planning on retirement at age 65. Your current salary is $45,000 and you expect your salary to increase at a rate of 5% per year as long as you work. To save for your retirement, you plan on making annual contributions to a retirement account. Your first contribution will be made on your 31st birthday and will be 8% of this year's salary. Likewise, you expect to deposit 8% of your salary each year until you reach age 65. Assume that the rate of interest is 7%.
-The future value at retirement (age 65)of your savings is closest to:

Accepted Answer

A)  $497,530 
B)  $928,895 
C)  $1,263,236 
D)  $108,000 
A)  $497,530 
B)  $928,895 
C)  $1,263,236 
D)  $108,000

Question 6

Use the information for the question(s) below.
Assume that you are 30 years old today, and that you are planning on retirement at age 65. Your current salary is $45,000 and you expect your salary to increase at a rate of 5% per year as long as you work. To save for your retirement, you plan on making annual contributions to a retirement account. Your first contribution will be made on your 31st birthday and will be 8% of this year's salary. Likewise, you expect to deposit 8% of your salary each year until you reach age 65. Assume that the rate of interest is 7%.
-Assume that you are 30 years old today,and that you are planning on retiring at age 65.Your current salary is $45,000 and you expect your salary to increase at a rate of 5% per year as long as you work.To save for your retirement,you plan on making annual contributions to a retirement account.Your first contribution will be made on your 31st birthday and will be 8% of this year's salary.Likewise,you expect to deposit 8% of your salary each year until you reach age 65.At retirement (age 65)you will begin withdrawing equal annual payments to pay for your living expenses during retirement (on your 65th birthday).If you expect to die one day before your 101st birthday (Your last withdraw will be on your 100th birthday)and if the annual rate of return is 7%,then how much money will you have to spend in each of your golden years of retirement?

Accepted Answer

$71,260
First deposit = .08 ×

Question 7

Use the table for the question(s) below.  
-If the interest rate is 6%,then the NPV of investment "A" is closest to:

Accepted Answer

A)  $70 
B)  $43 
C)  -$32 
D)  $9 
A)  $70 
B)  $43 
C)  -$32 
D)  $9

Question 8

Use the information for the question(s) below.
Assume that you are 30 years old today, and that you are planning on retirement at age 65. Your current salary is $45,000 and you expect your salary to increase at a rate of 5% per year as long as you work. To save for your retirement, you plan on making annual contributions to a retirement account. Your first contribution will be made on your 31st birthday and will be 8% of this year's salary. Likewise, you expect to deposit 8% of your salary each year until you reach age 65. Assume that the rate of interest is 7%.
-How do you calculate (mathematically)the present value of a(n):
(a)perpetuity
(b)annuity
(c)growing perpetuity
(d)growing annuity

Accepted Answer

(a)PV of a perpetuity = @#IMG-DLM& (b)PV

Question 9

You are looking for a new truck and see the following advertisement."Own a new truck! No money down.Just five easy annual payments of $8000." You know that you can get the same truck from the dealer across town for only $31,120.The interest rate for the deal advertised is closest to:

Accepted Answer

A)  9% 
B)  8% 
C)  8.5% 
D)  10% 
A)  9% 
B)  8% 
C)  8.5% 
D)  10%

Question 10

Which of the following formulas is incorrect?

Accepted Answer

A)  PV of a growing annuity = C ×   
B)  PV of an annuity = C ×   
C)  PV of a growing perpetuity =   
D)  PV of a perpetuity =   
A)  PV of a growing annuity = C ×   
B)  PV of an annuity = C ×   
C)  PV of a growing perpetuity =   
D)  PV of a perpetuity =

Question 11

Use the information for the question(s) below.
Suppose that a young couple has just had their first baby and they wish to ensure that enough money will be available to pay for their child's college education. Currently college tuition, books, fees, and other costs average $12,500 per year. On average, tuition and other costs have historically increased at a rate of 4% per year.
-A Canadian company issues an 8-year term bond with face value of $1,000 and 6% coupon rate.If the market prevailing effective rate of interest is 5.75%,what is the price an investor will have to pay?

Accepted Answer

A)  $1,015.85 
B)  $1,200.00 
C)  $1,150.00 
D)  $1,215.00 
A)  $1,015.85 
B)  $1,200.00 
C)  $1,150.00 
D)  $1,215.00

Question 12

Which of the following statements is false?

Accepted Answer

A)  Finding the present value and compounding are the same. 
B)  A dollar today and a dollar in one year are not equivalent. 
C)  If you want to compare or combine cash flows that occur at different points in time, you first need to convert the cash flows into the same units or move them to the same point in time. 
D)  The equivalent value of two cash flows at two different points in time is sometimes referred to as the time value of money. 
A)  Finding the present value and compounding are the same. 
B)  A dollar today and a dollar in one year are not equivalent. 
C)  If you want to compare or combine cash flows that occur at different points in time, you first need to convert the cash flows into the same units or move them to the same point in time. 
D)  The equivalent value of two cash flows at two different points in time is sometimes referred to as the time value of money.

Question 13

Use the information for the question(s) below.
Suppose that a young couple has just had their first baby and they wish to ensure that enough money will be available to pay for their child's college education. Currently college tuition, books, fees, and other costs average $12,500 per year. On average, tuition and other costs have historically increased at a rate of 4% per year.
-After many years teaching finance at Capilano University,Allen wants to establish a scholarship to offer 4 $1,000 awards to students whose performance is excellent in finance courses.If the university can negotiate a 12.75% effective interest rate,at least how much does Allen need to endorse over to the scholarship (closest estimate)?

Accepted Answer

A)  $32,000 
B)  $31,000 
C)  $31,500 
D)  $32,500 
A)  $32,000 
B)  $31,000 
C)  $31,500 
D)  $32,500

Question 14

You are considering purchasing a new home.You will need to borrow $250,000 to purchase the home.A mortgage company offers you a 15 year fixed rate mortgage (180 months)at 9% APR (0.75% month).If you borrow the money from this mortgage company,your monthly mortgage payment will be closest to:

Accepted Answer

A)  $2,585 
B)  $660 
C)  $2,535 
D)  $1,390 
A)  $2,585 
B)  $660 
C)  $2,535 
D)  $1,390

Question 15

You are saving for retirement.To live comfortably,you decide that you will need $2.5 million dollars by the time you are 65.Today is your 30th birthday,and you decide that,starting today,on every birthday up to and including your 65th birthday you will deposit the same amount into your savings account.Assuming the interest rate is 5%,the amount that you must set aside each and every year on your birthday is closest to:

Accepted Answer

A)  $71,430 
B)  $27,680 
C)  $26,100 
D)  $26,260 
A)  $71,430 
B)  $27,680 
C)  $26,100 
D)  $26,260

Question 16

Consider the following timeline detailing a stream of cash flows:   If the current market rate of interest is 8%,then the future value of this stream of cash flows is closest to:

Accepted Answer

A)  $11,699 
B)  $10,832 
C)  $12,635 
D)  $10,339 
A)  $11,699 
B)  $10,832 
C)  $12,635 
D)  $10,339

Question 17

Use the information for the question(s) below.
Assume that you are 30 years old today, and that you are planning on retirement at age 65. Your current salary is $45,000 and you expect your salary to increase at a rate of 5% per year as long as you work. To save for your retirement, you plan on making annual contributions to a retirement account. Your first contribution will be made on your 31st birthday and will be 8% of this year's salary. Likewise, you expect to deposit 8% of your salary each year until you reach age 65. Assume that the rate of interest is 7%.
-Your son is about to start kindergarten in a private school.Currently,the tuition is $12,000 per year,payable at the start of the school year.You expect annual tuition increases to average 6% per year over the next 13 years.Assuming that your son remains in this private school through high school and that your current interest rate is 7%,then the present value of your son's private school education is closest to:

Accepted Answer

A)  $332,300 
B)  $137,900 
C)  $155,800 
D)  $156,000 
A)  $332,300 
B)  $137,900 
C)  $155,800 
D)  $156,000

Question 18

Suppose you invest $1000 into a mutual fund that is expected to earn a rate of return of 10%.The amount of money will you have in 10 years is closest to which of the following? The amount you will have in 50 years is closest to which of the following?

Accepted Answer

A)  $386; $9 
B)  $2,594; $45,259 
C)  $2,594; $117,391 
D)  $3,138; $ 1,311,892 
A)  $386; $9 
B)  $2,594; $45,259 
C)  $2,594; $117,391 
D)  $3,138; $ 1,311,892

Question 19

Use the information for the question(s) below.
Assume that you are 30 years old today, and that you are planning on retirement at age 65. Your current salary is $45,000 and you expect your salary to increase at a rate of 5% per year as long as you work. To save for your retirement, you plan on making annual contributions to a retirement account. Your first contribution will be made on your 31st birthday and will be 8% of this year's salary. Likewise, you expect to deposit 8% of your salary each year until you reach age 65. Assume that the rate of interest is 7%.
-You work for a pharmaceutical company that has developed a new drug.The patent on the drug will last for 17 years.You expect that the drug will produce cash flows of $10 million in its first year and that this amount will grow at a rate of 4% per year for the next 17 years.Once the patent expires,other pharmaceutical companies will be able to produce generic equivalents of your drug and competition will drive any future profits to zero.If the interest rate is 12% per year,then the present value of producing this drug is closest to:

Accepted Answer

A)  $71 million 
B)  $90 million 
C)  $170 million 
D)  $105 million 
A)  $71 million 
B)  $90 million 
C)  $170 million 
D)  $105 million

Question 20

You are considering investing in a security that will pay you $80 in interest at the end of each of the next 10 years.If this security is currently selling for $588.81,then the IRR for investing in this security is closest to:

Accepted Answer

A)  6.0% 
B)  7.0% 
C)  6.5% 
D)  5.0% 
A)  6.0% 
B)  7.0% 
C)  6.5% 
D)  5.0%

Exam 4: The Time Value of Money

Consider the following timeline: If the current market rate of interest is 12%,then the net present value of the cash flows is closest to:

Use the figure for the question(s) below. -Which of the following statements regarding the timeline is false?

Use the table for the question(s) below. -If the interest rate is 6%,then the NPV of investment "A" is closest to:

You are looking for a new truck and see the following advertisement."Own a new truck! No money down.Just five easy annual payments of $8000." You know that you can get the same truck from the dealer across town for only $31,120.The interest rate for the deal advertised is closest to:

Which of the following formulas is incorrect?

Which of the following statements is false?

You are considering purchasing a new home.You will need to borrow $250,000 to purchase the home.A mortgage company offers you a 15 year fixed rate mortgage (180 months)at 9% APR (0.75% month).If you borrow the money from this mortgage company,your monthly mortgage payment will be closest to:

Consider the following timeline detailing a stream of cash flows: If the current market rate of interest is 8%,then the future value of this stream of cash flows is closest to:

Suppose you invest $1000 into a mutual fund that is expected to earn a rate of return of 10%.The amount of money will you have in 10 years is closest to which of the following? The amount you will have in 50 years is closest to which of the following?

You are considering investing in a security that will pay you $80 in interest at the end of each of the next 10 years.If this security is currently selling for $588.81,then the IRR for investing in this security is closest to:

The Corporation

Introduction to Financial Statement Analysis

Arbitrage and Financial Decision Making

Interest Rates

Investment Decision Rules

Fundamentals of Capital Budgeting

Valuing Bonds

Valuing Stocks

Capital Markets and the Pricing of Risk

Optimal Portfolio Choice and the Capital Asset Pricing Model

Estimating the Cost of Capital

Investor Behaviour and Capital Market Efficiency

Capital Structure in a Perfect Market

Debt and Taxes

Financial Distress, managerial Incentives, and Information

Payout Policy

Capital Budgeting and Valuation With Leverage

Valuation and Financial Modeling: a Case Study

Financial Options

Option Valuation

Real Options

The Mechanics of Raising Equity Capital

Debt Financing

Leasing

Working Capital Management

Short-Term Financial Planning

Mergers and Acquisitions

Corporate Governance

Risk Management

International Corporate Finance

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