Question 1

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 not 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 can be constructed for annuities where the payments occur at either the beginning or the end 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 not 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 can be constructed for annuities where the payments occur at either the beginning or the end of the periods.

Question 2

A perpetuity pays $85 per year and costs $950. What is the rate of return?

Accepted Answer

A)  8.95% 
B)  9.39% 
C)  9.86% 
D)  10.36% 
E)  10.88% 
A)  8.95% 
B)  9.39% 
C)  9.86% 
D)  10.36% 
E)  10.88%

Question 3

Scott and Linda have been saving to pay for their daughter Casie's college education. Casie just turned 10 at (t = 0), and she will be entering college 8 years from now (at t = 8). College tuition and expenses at State U. are currently $14,500 a year, but they are expected to increase at a rate of 3.5% a year. Ellen should graduate in 4 yearsσif she takes longer or wants to go to graduate school, she will be on her own. Tuition and other costs will be due at the beginning of each school year (at t = 8, 9, 10, and 11).σσSo far, Scott and Linda have accumulated $15,000 in their college savings account (at t = 0). Their long-run financial plan is to add an additional $5,000 in each of the next 4 years (at t = 1, 2, 3, and 4). Then they plan to make 3 equal annual contributions in each of the following years, t = 5, 6, and 7. They expect their investment account to earn 9%. How large must the annual payments at t = 5, 6, and 7 be to cover Casie's anticipated college costs?

Accepted Answer

A)  $1,965.21 
B)  $2,068.64 
C)  $2,177.51 
D)  $2,292.12 
E)  $2,412.76 
A)  $1,965.21 
B)  $2,068.64 
C)  $2,177.51 
D)  $2,292.12 
E)  $2,412.76

Question 4

Your uncle just won the weekly lottery, receiving $375,000, which he invested at a 7.5% annual rate. He now has decided to retire, and he wants to withdraw $35,000 at the end of each year, starting at the end of this year. What is the maximum number of whole payments that can be withdrawn before the account is exhausted, i.e., before the account balance would become negative? (Hint: Round down to the nearest whole number.)

Accepted Answer

A)  22 
B)  23 
C)  24 
D)  25 
E)  26 
A)  22 
B)  23 
C)  24 
D)  25 
E)  26

Question 5

Wildwoods, Inc. earned $1.50 per share five years ago. Its earnings this year were $3.20. What was the growth rate in earnings per share (EPS) over the 5-year period?

Accepted Answer

A)  15.54% 
B)  16.36% 
C)  17.18% 
D)  18.04% 
E)  18.94% 
A)  15.54% 
B)  16.36% 
C)  17.18% 
D)  18.04% 
E)  18.94%

Question 6

Partners Bank offers to lend you $50,000 at a nominal rate of 5.0%, simple interest, with interest paid quarterly. An offer to lend you the $50,000 also comes from Community Bank, but it will charge 6.0%, simple interest, with interest paid at the end of the year. What's the difference in the effective annual rates charged by the two banks?

Accepted Answer

A)  1.56% 
B)  1.30% 
C)  1.09% 
D)  0.91% 
E)  0.72% 
A)  1.56% 
B)  1.30% 
C)  1.09% 
D)  0.91% 
E)  0.72%

Question 7

The greater the number of compounding periods within a year, then (1) the greater the future value of a lump sum investment at Time 0 and (2) the smaller the present value of a given lump sum to be received at some future date.

Accepted Answer

A) True 
 B)False

Question 8

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 9

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 10

You are hoping to buy a new boat 3 years from now, and you plan to save $4,200 per year, beginning one year from today. You will deposit your savings in an account that pays 5.2% interest. How much will you have just after you make the 3rd deposit, 3 years from now?

Accepted Answer

A)  $11,973 
B)  $12,603 
C)  $13,267 
D)  $13,930 
E)  $14,626 
A)  $11,973 
B)  $12,603 
C)  $13,267 
D)  $13,930 
E)  $14,626

Question 11

Suppose you borrowed $15,000 at a rate of 8.5% and must repay it in 5 equal installments at the end of each of the next 5 years. By how much would you reduce the amount you owe in the first year?

Accepted Answer

A)  $2,404.91 
B)  $2,531.49 
C)  $2,658.06 
D)  $2,790.96 
E)  $2,930.51 
A)  $2,404.91 
B)  $2,531.49 
C)  $2,658.06 
D)  $2,790.96 
E)  $2,930.51

Question 12

JG Asset Services is recommending that you invest $1,500 in a 5-year certificate of deposit (CD) that pays 3.5% interest, compounded annually. How much will you have when the CD matures?

Accepted Answer

A)  $1,781.53 
B)  $1,870.61 
C)  $1,964.14 
D)  $2,062.34 
E)  $2,165.46 
A)  $1,781.53 
B)  $1,870.61 
C)  $1,964.14 
D)  $2,062.34 
E)  $2,165.46

Question 13

When a loan is amortized, a relatively low percentage of the payment goes to reduce the outstanding principal in the early years, and the principal repayment's percentage increases in the loan's later years.

Accepted Answer

A) True 
 B)False

Question 14

A $250,000 loan is to be amortized over 8 years, with annual end-of-year payments. Which of these statements is CORRECT?

Accepted Answer

A)  the proportion of interest versus principal repayment would be the same for each of the 8 payments. 
B)  the annual payments would be larger if the interest rate were lower. 
C)  if the loan were amortized over 10 years rather than 8 years, and if the interest rate were the same in either case, the first payment would include more dollars of interest under the 8-year amortization plan. 
D)  the proportion of each payment that represents interest as opposed to repayment of principal would be lower if the interest rate were lower. 
E)  the last payment would have a higher proportion of interest than the first payment. 
A)  the proportion of interest versus principal repayment would be the same for each of the 8 payments. 
B)  the annual payments would be larger if the interest rate were lower. 
C)  if the loan were amortized over 10 years rather than 8 years, and if the interest rate were the same in either case, the first payment would include more dollars of interest under the 8-year amortization plan. 
D)  the proportion of each payment that represents interest as opposed to repayment of principal would be lower if the interest rate were lower. 
E)  the last payment would have a higher proportion of interest than the first payment.

Question 15

What's the present value of a 4-year ordinary annuity of $2,250 per year plus an additional $3,000 at the end of Year 4 if the interest rate is 5%?

Accepted Answer

A)  $8,509 
B)  $8,957 
C)  $9,428 
D)  $9,924 
E)  $10,446 
A)  $8,509 
B)  $8,957 
C)  $9,428 
D)  $9,924 
E)  $10,446

Question 16

Your cousin will sell you his coffee shop for $250,000, with "seller financing," at a 6.0% nominal annual rate. The terms of the loan would require you to make 12 equal end-of-month payments per year for 4 years, and then make an additional final (balloon) payment of $50,000 at the end of the last month. What would your equal monthly payments be?

Accepted Answer

A)  $4,029.37 
B)  $4,241.44 
C)  $4,464.67 
D)  $4,699.66 
E)  $4,947.01 
A)  $4,029.37 
B)  $4,241.44 
C)  $4,464.67 
D)  $4,699.66 
E)  $4,947.01

Question 17

Which of the following bank accounts has the lowest effective annual return?

Accepted Answer

A)  an account that pays 8% nominal interest with daily (365-day) compounding. 
B)  an account that pays 8% nominal interest with monthly compounding. 
C)  an account that pays 8% nominal interest with annual compounding. 
D)  an account that pays 7% nominal interest with daily (365-day) compounding. 
E)  an account that pays 7% nominal interest with monthly compounding. 
A)  an account that pays 8% nominal interest with daily (365-day) compounding. 
B)  an account that pays 8% nominal interest with monthly compounding. 
C)  an account that pays 8% nominal interest with annual compounding. 
D)  an account that pays 7% nominal interest with daily (365-day) compounding. 
E)  an account that pays 7% nominal interest with monthly compounding.

Question 18

You would like to travel in South America 5 years from now, and you can save $3,100 per year, beginning one year from today. You plan to deposit the funds in a mutual fund that you think will return 8.5% per year. Under these conditions, how much would you have just after you make the 5th deposit, 5 years from now?

Accepted Answer

A)  $18,369 
B)  $19,287 
C)  $20,251 
D)  $21,264 
E)  $22,327 
A)  $18,369 
B)  $19,287 
C)  $20,251 
D)  $21,264 
E)  $22,327

Question 19

Your older brother turned 35 today, and he is planning to save $7,000 per year for retirement, with the first deposit to be made one year from today. He will invest in a mutual fund that's expected to provide a return of 7.5% per year. He plans to retire 30 years from today, when he turns 65, and he expects to live for 25 years after retirement, to age 90. Under these assumptions, how much can he spend each year after he retires? His first withdrawal will be made at the end of his first retirement year.

Accepted Answer

A)  $58,601 
B)  $61,686 
C)  $64,932 
D)  $68,179 
E)  $71,588 
A)  $58,601 
B)  $61,686 
C)  $64,932 
D)  $68,179 
E)  $71,588

Question 20

Your bank account pays a 5% nominal rate of interest. The interest is compounded quarterly. Which of the following statements is CORRECT?

Accepted Answer

A)  the periodic rate of interest is 5% and the effective rate of interest is also 5%. 
B)  the periodic rate of interest is 1.25% and the effective rate of interest is 2.5%. 
C)  the periodic rate of interest is 5% and the effective rate of interest is greater than 5%. 
D)  the periodic rate of interest is 1.25% and the effective rate of interest is greater than 5%. 
E)  the periodic rate of interest is 2.5% and the effective rate of interest is 5%. 
A)  the periodic rate of interest is 5% and the effective rate of interest is also 5%. 
B)  the periodic rate of interest is 1.25% and the effective rate of interest is 2.5%. 
C)  the periodic rate of interest is 5% and the effective rate of interest is greater than 5%. 
D)  the periodic rate of interest is 1.25% and the effective rate of interest is greater than 5%. 
E)  the periodic rate of interest is 2.5% and the effective rate of interest is 5%.

Exam 28: Time Value of Money

Which of the following statements is CORRECT?

A perpetuity pays $85 per year and costs $950. What is the rate of return?

Wildwoods, Inc. earned $1.50 per share five years ago. Its earnings this year were $3.20. What was the growth rate in earnings per share (EPS) over the 5-year period?

The greater the number of compounding periods within a year, then (1) the greater the future value of a lump sum investment at Time 0 and (2) the smaller the present value of a given lump sum to be received at some future date.

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 are hoping to buy a new boat 3 years from now, and you plan to save $4,200 per year, beginning one year from today. You will deposit your savings in an account that pays 5.2% interest. How much will you have just after you make the 3rd deposit, 3 years from now?

Suppose you borrowed $15,000 at a rate of 8.5% and must repay it in 5 equal installments at the end of each of the next 5 years. By how much would you reduce the amount you owe in the first year?

JG Asset Services is recommending that you invest $1,500 in a 5-year certificate of deposit (CD) that pays 3.5% interest, compounded annually. How much will you have when the CD matures?

When a loan is amortized, a relatively low percentage of the payment goes to reduce the outstanding principal in the early years, and the principal repayment's percentage increases in the loan's later years.

A $250,000 loan is to be amortized over 8 years, with annual end-of-year payments. Which of these statements is CORRECT?

What's the present value of a 4-year ordinary annuity of $2,250 per year plus an additional $3,000 at the end of Year 4 if the interest rate is 5%?

Which of the following bank accounts has the lowest effective annual return?

Your bank account pays a 5% nominal rate of interest. The interest is compounded quarterly. Which of the following statements is CORRECT?

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 Criteria

Capital Budgeting-Estimating Cash Flows and Analyzing Risk

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

Other Topics in Working Capital Management

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

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