Question 1

Which of the following statements is false?

Accepted Answer

A)  The difference between an annuity and a perpetuity is that an annuity ends after some fixed number of payments. 
B)  Most car loans, mortgages, and some bonds are annuities. 
C)  A growing perpetuity is a cash flow stream that occurs at regular intervals and grows at a constant rate forever. 
D)  An annuity is a stream of N equal cash flows paid at irregular intervals. 
A)  The difference between an annuity and a perpetuity is that an annuity ends after some fixed number of payments. 
B)  Most car loans, mortgages, and some bonds are annuities. 
C)  A growing perpetuity is a cash flow stream that occurs at regular intervals and grows at a constant rate forever. 
D)  An annuity is a stream of N equal cash flows paid at irregular intervals. D

Question 2

You have an investment opportunity that will cost you $10,000 today,but return $12,500 to you in one year.The IRR of this investment opportunity is closest to:

Accepted Answer

A)  80% 
B)  125% 
C)  20% 
D)  25% 
A)  80% 
B)  125% 
C)  20% 
D)  25% D

Question 3

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 C

Question 4

By quitting smoking,Lisa could save $350 per month in an account with an effective rate of interest at 8.75%.How long will it take her to accumulate $100,000?

Accepted Answer

A)  13.1 years 
B)  15.2 years 
C)  12.8 years 
D)  14.2 years 
A)  13.1 years 
B)  15.2 years 
C)  12.8 years 
D)  14.2 years

Question 5

Use the table for the question(s) below.
  
-If the interest rate is 10%,then which investment(s),if any,would you take and why?

Accepted Answer

NPV_A = -150 + 40 / (1.10)¹ + 80

Question 6

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 university 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 $2,000 on their daughter's first birthday and plan to increase the size of their deposits by 5% each year.Assuming that the parents have already made the deposit for their daughter's 18th birthday,then the amount available for the daughter's university expenses on her 18th birthday is closest to:

Accepted Answer

A)  $42,825 
B)  $97,331 
C)  $67,998 
D)  $103,063 
A)  $42,825 
B)  $97,331 
C)  $67,998 
D)  $103,063

Question 7

When you compare or combine cash flows,you can only compare or combine them

Accepted Answer

A)  at different present time points. 
B)  at one time point. 
C)  at different future time points. 
D)  none of the above. 
A)  at different present time points. 
B)  at one time point. 
C)  at different future time points. 
D)  none of the above.

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%.
-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 9

After your grandmother retired,she purchased an annuity contract for $250,000 that will pay her $25,000 at the end of every year until she dies.The appropriate interest rate for this annuity is 8%.The number of years that your grandmother must live in order to get more value out of the annuity than what she paid for it is closest to:

Accepted Answer

A)  21 
B)  16 
C)  8 
D)  10 
A)  21 
B)  16 
C)  8 
D)  10

Question 10

Consider the following timeline:   If the current market rate of interest is 8%,then the present value of this timeline is closest to:

Accepted Answer

A)  $1,000 
B)  $857 
C)  $860 
D)  $926 
A)  $1,000 
B)  $857 
C)  $860 
D)  $926

Question 11

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.

Question 12

Which of the following statements is false?

Accepted Answer

A)  FV =   
B)  PV =  
  
C)  FV =   Cn × (1 + r)N-n 
D)  Most investment opportunities have multiple cash flows that occur at different points in time. 
A)  FV =   
B)  PV =  
  
C)  FV =   Cn × (1 + r)N-n 
D)  Most investment opportunities have multiple cash flows that occur at different points in time.

Question 13

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 you son remains in this private school through high school and that your current interest rate is 6%,then the present value of your son's private school education is closest to:

Accepted Answer

A)  $106,230 
B)  $156,000 
C)  $137,900 
D)  This problem cannot be solved. 
A)  $106,230 
B)  $156,000 
C)  $137,900 
D)  This problem cannot be solved.

Question 14

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%

Question 15

Use the information for the question(s) below.
Joe just inherited the family business, and having no desire to run the family business, he has decided to sell it to an entrepreneur. In exchange for the family business, Joe has been offered an immediate payment of $100,000. Joe will also receive payments of $50,000 in one year, $50,000 in two years, and $75,000 in three years. The current market rate of interest for Joe is 6%.
-You have been offered the following investment opportunity: if you pay $2,500 today,you will receive $1,000 at the end of each of the next three years.Assuming that you could otherwise earn 10% per year on your money,the NPV for this opportunity is closest to:

Accepted Answer

A)  $12 
B)  $18 
C)  -$13 
D)  $500 
A)  $12 
B)  $18 
C)  -$13 
D)  $500

Question 16

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 university education. Currently university 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.
-Assuming that costs continue to increase an average of 4% per year,tuition and other costs for one year for this student in 18 years when she enters university will be closest to:

Accepted Answer

A)  $12,500 
B)  $21,500 
C)  $320,568 
D)  $25,323 
A)  $12,500 
B)  $21,500 
C)  $320,568 
D)  $25,323

Question 17

The British government has just issued a new consol bond that sells for £1000 and pays interest of 8%.The annual interest payment on this bond must be:

Accepted Answer

A)  £80 
B)  £8 
C)  £1,000 
D)  £12,500 
A)  £80 
B)  £8 
C)  £1,000 
D)  £12,500

Question 18

Mr.Zhu is selling his business for retirement.It is expected that the cash flows from his business in each of next 5 years will be $500,000.At the end of the 5 years,the residual value of the business is expected to be $8 million.Mr.Zhu has his expected rate of return of 12.0% .What could be the closest estimate to his "fair market value" (of similar business)at which he would be willing to sell his business?

Accepted Answer

A)  $6.34 million 
B)  $6.00 million 
C)  $5.80 million 
D)  $6.50 million 
A)  $6.34 million 
B)  $6.00 million 
C)  $5.80 million 
D)  $6.50 million

Question 19

When a value or a cash flow is compounded or discounted,the value or cash flow will have

Accepted Answer

A)  linear growth. 
B)  exponential growth. 
C)  constant growth. 
D)  percentage growth. 
A)  linear growth. 
B)  exponential growth. 
C)  constant growth. 
D)  percentage growth.

Question 20

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 $8,000." 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%

Exam 4: The Time Value of Money

Which of the following statements is false?

You have an investment opportunity that will cost you $10,000 today,but return $12,500 to you in one year.The IRR of this investment opportunity is closest to:

By quitting smoking,Lisa could save $350 per month in an account with an effective rate of interest at 8.75%.How long will it take her to accumulate $100,000?

Use the table for the question(s) below. -If the interest rate is 10%,then which investment(s),if any,would you take and why?

When you compare or combine cash flows,you can only compare or combine them

Consider the following timeline: If the current market rate of interest is 8%,then the present value of this timeline is closest to:

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

Which of the following statements is false?

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 British government has just issued a new consol bond that sells for £1000 and pays interest of 8%.The annual interest payment on this bond must be:

When a value or a cash flow is compounded or discounted,the value or cash flow will have

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 $8,000." 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:

The Corporation

Introduction to Financial Statement Analysis

Arbitrage and Financial Decision Making

Interest Rates

Valuing Bonds

Valuing Stocks

Investment Decision Rules

Fundamentals of Capital Budgeting

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

Financial Options

Option Valuation

Real Options

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 Modelling: a Case Study

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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