Question 1

Mark invests in a 10-year annuity with an initial payment of $20,000,that grows at 4% per year.What is the future value of this annuity,if the interest rate is 8%?

Accepted Answer

A) $200,000 
B) $339,340.36 
C) $157,180.24 
D) $162,217.92 
E) $350,216.31 
A) $200,000 
B) $339,340.36 
C) $157,180.24 
D) $162,217.92 
E) $350,216.31

Question 2

Jackie and her husband started a savings account for their twin daughters when they were 2 years old.They have been saving $100,000 a year at an interest rate of 10%,and intend on keeping up with their annual contribution to the fund until the girls are 21.What is the future value of their investment?

Accepted Answer

A) $864,869.43 
B) $836,492.01 
C) $5,115,909.05 
D) $6,400,249.94 
E) $2,090,000 
A) $864,869.43 
B) $836,492.01 
C) $5,115,909.05 
D) $6,400,249.94 
E) $2,090,000

Question 3

Alex buys a consol (perpetual bond)for $90,000.This consol promises him a fixed cash flow of $10,000 every year,forever,starting at the end of the year.If the current market rate is 10%,what is the net present value of his purchase?

Accepted Answer

A) $10,000 
B) $100,000 
C) $90,000 
D) $80,000 
E) $190,000 
A) $10,000 
B) $100,000 
C) $90,000 
D) $80,000 
E) $190,000

Question 4

Damon is contemplating taking a deal with his uncle,who is a very successful entrepreneur.He must pay his uncle $50,000 this year and an additional $50,000 at the end of both the fifth and tenth year.This would allow him to receive a perpetual annual cashflow of $12,000.What is the NPV of this offer if the interest rate is 10%?

Accepted Answer

A) $120,000 
B) $30,000 
C) $220,323.23 
D) $69,676.77 
E) $19,676.77 
A) $120,000 
B) $30,000 
C) $220,323.23 
D) $69,676.77 
E) $19,676.77

Question 5

Why must a growing perpetuity have a growth rate less than the discount rate?

Accepted Answer

If g > r,the cash flows grow faster than

Question 6

An annuity will pay you $5,000 per year for 25 years.What is the FV of this annuity at the end of 25 years,if your interest rate is 8%?

Accepted Answer

A) $126,207 
B) $365,530 
C) $125,000 
D) $135,000 
E) $53,374 
A) $126,207 
B) $365,530 
C) $125,000 
D) $135,000 
E) $53,374

Question 7

You are interested in purchasing a new automobile that costs $35,000.The dealership offers you a special financing rate of 6% APR (0.5%)per month for 48 months.Assuming that you do not make a down payment on the auto and you take the dealer's financing deal,then your monthly car payments would be closest to:

Accepted Answer

A) $729 
B) $822 
C) $842 
D) $647 
E) $789 
A) $729 
B) $822 
C) $842 
D) $647 
E) $789

Question 8

An annuity will pay you $1,000 per year for 75 years.What is the PV of this annuity if your cost of capital is 4%?

Accepted Answer

A) $25,000 
B) $72,115 
C) $75,000 
D) $23,680 
E) $24,038 
A) $25,000 
B) $72,115 
C) $75,000 
D) $23,680 
E) $24,038

Question 9

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) $2585 
B) $660 
C) $2535 
D) $1390 
E) $1868 
A) $2585 
B) $660 
C) $2535 
D) $1390 
E) $1868

Question 10

A perpetuity will pay $1000 per year,starting five years after the perpetuity is purchased.What is the future value (FV)of this perpetuity,given that the interest rate is 4%?

Accepted Answer

A) $1410 
B) $20,582 
C) $21,370 
D) $25,000 
E) There is no solution to this problem. 
A) $1410 
B) $20,582 
C) $21,370 
D) $25,000 
E) There is no solution to this problem.

Question 11

The internal rate of return (IRR)is the interest rate that sets the net present value (NPV)of the cash flows equal to zero.

Accepted Answer

A) True 
 B)False

Question 12

What is the decision criteria for the Net Present Value rule?

Accepted Answer

The decision criteria for the Net Presen

Question 13

Joey buys a bond for $10,000 that will mature in 25 years.He will receive a single payment of $150,000 when the bond reaches maturity.What is the interest rate?

Accepted Answer

A) 15% 
B) 11.44% 
C) 114.4% 
D) 6.67% 
E) 10% 
A) 15% 
B) 11.44% 
C) 114.4% 
D) 6.67% 
E) 10%

Question 14

Since your first birthday,your grandparents have been depositing $100 into a savings account every month.The account pays 4% interest annually.Immediately after your grandparents make the deposit on your 18th birthday,the amount of money in your savings account will be closest to:

Accepted Answer

A) $11,941,266 
B) $31,559 
C) $30,774 
D) $21,600 
E) $31,764 
A) $11,941,266 
B) $31,559 
C) $30,774 
D) $21,600 
E) $31,764

Question 15

You are borrowing money to buy a car.If you can make payments of $300 per month starting one month from now at an interest rate of 4%,how much will you be able to borrow for the car today if you finance the amount over four years?

Accepted Answer

A) $6,358.54 
B) $13,067.62 
C) $15,587.88 
D) $13,286.65 
E) $15,287.27 
A) $6,358.54 
B) $13,067.62 
C) $15,587.88 
D) $13,286.65 
E) $15,287.27

Question 16

Can we apply the annuity or perpetuity equations to cash flows that do NOT arrive at regular intervals?

Accepted Answer

No,these formulas only apply w

Question 17

Clarissa wants to fund a growing perpetuity that will pay $5000 per year to a local museum,starting next year.She wants the annual amount paid to the museum to grow by 5% per year.Given that the interest rate is 8%,how much does she need to fund this perpetuity?

Accepted Answer

A) $62,500.00 
B) $102,112.33 
C) $143,445.65 
D) $166,666.67 
E) $100,000.00 
A) $62,500.00 
B) $102,112.33 
C) $143,445.65 
D) $166,666.67 
E) $100,000.00

Question 18

An annuity will pay you $12,000 per year for 20 years.What is the PV of this annuity if your cost of capital is 7%?

Accepted Answer

A) $224,299 
B) $240,000 
C) $127,128 
D) $491,946 
E) $238,245 
A) $224,299 
B) $240,000 
C) $127,128 
D) $491,946 
E) $238,245

Question 19

Matthew wants to take out a loan to buy a car.He calculates that he can make repayments of $4000 per year.If he can get a five-year loan with an interest rate of 7.5%,what is the maximum price he can pay for the car?

Accepted Answer

A) $16,184 
B) $18,243 
C) $20,324 
D) $21,674 
E) $20,000 
A) $16,184 
B) $18,243 
C) $20,324 
D) $21,674 
E) $20,000

Question 20

What is the difference between a perpetuity and an annuity?

Accepted Answer

A perpetuity is a constant str

Exam 4: The Time Value of Money

Mark invests in a 10-year annuity with an initial payment of $20,000,that grows at 4% per year.What is the future value of this annuity,if the interest rate is 8%?

Alex buys a consol (perpetual bond)for $90,000.This consol promises him a fixed cash flow of $10,000 every year,forever,starting at the end of the year.If the current market rate is 10%,what is the net present value of his purchase?

Why must a growing perpetuity have a growth rate less than the discount rate?

An annuity will pay you $5,000 per year for 25 years.What is the FV of this annuity at the end of 25 years,if your interest rate is 8%?

An annuity will pay you $1,000 per year for 75 years.What is the PV of this annuity if your cost of capital is 4%?

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:

A perpetuity will pay $1000 per year,starting five years after the perpetuity is purchased.What is the future value (FV)of this perpetuity,given that the interest rate is 4%?

The internal rate of return (IRR)is the interest rate that sets the net present value (NPV)of the cash flows equal to zero.

What is the decision criteria for the Net Present Value rule?

Joey buys a bond for $10,000 that will mature in 25 years.He will receive a single payment of $150,000 when the bond reaches maturity.What is the interest rate?

Since your first birthday,your grandparents have been depositing $100 into a savings account every month.The account pays 4% interest annually.Immediately after your grandparents make the deposit on your 18th birthday,the amount of money in your savings account will be closest to:

You are borrowing money to buy a car.If you can make payments of $300 per month starting one month from now at an interest rate of 4%,how much will you be able to borrow for the car today if you finance the amount over four years?

Can we apply the annuity or perpetuity equations to cash flows that do NOT arrive at regular intervals?

Clarissa wants to fund a growing perpetuity that will pay $5000 per year to a local museum,starting next year.She wants the annual amount paid to the museum to grow by 5% per year.Given that the interest rate is 8%,how much does she need to fund this perpetuity?

An annuity will pay you $12,000 per year for 20 years.What is the PV of this annuity if your cost of capital is 7%?

Matthew wants to take out a loan to buy a car.He calculates that he can make repayments of $4000 per year.If he can get a five-year loan with an interest rate of 7.5%,what is the maximum price he can pay for the car?

What is the difference between a perpetuity and an annuity?

Corporate Finance and the Financial Manager

Introduction to Financial Statement Analysis

The Valuation Principle: the Foundation of Financial Decision Making

Interest Rates

Bonds

Valuing Stocks

Investment Decision Rules

Fundamentals of Capital Budgeting

Risk and Return in Capital Markets

Systematic Risk and the Equity Risk Premium

Determining the Cost of Capital

Risk and the Pricing of Options

Raising Equity Capital

Debt Financing

Capital Structure

Payout Policy

Financial Modelling and Pro Forma Analysis

Working Capital Management

Short-Term Financial Planning

Risk Management

International Corporate Finance

Leasing

Mergers and Acquisitions

Corporate Governance

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