Question 1

A growing perpetuity where the rate of growth is greater than the discount rate will have an infinitely large present value (PV).

Accepted Answer

A) True 
 B)False

Question 2

Consider the following timeline detailing a stream of cash flows:   If the current market rate of interest is 10%,then the present value (PV)of this stream of cash flows is closest to:

Accepted Answer

A) $674 
B) $600 
C) $460 
D) $287 
E) $410 
A) $674 
B) $600 
C) $460 
D) $287 
E) $410

Question 3

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

Accepted Answer

A) $22,871 
B) $21,211 
C) $24,074 
D) $26,000 
E) $19,111 
A) $22,871 
B) $21,211 
C) $24,074 
D) $26,000 
E) $19,111

Question 4

What is the future value of this annuity?

Accepted Answer

A) $243,145.35 
B) $200,000 
C) $181,692.35 
D) $168,494.55 
E) $238,301.70 
A) $243,145.35 
B) $200,000 
C) $181,692.35 
D) $168,494.55 
E) $238,301.70

Question 5

Cash flows from an annuity occur every year in the future.

Accepted Answer

A) True 
 B)False

Question 6

If a few intermediate cash flows in valuing a stream of cash flows are zero,can we delete those points on the timeline and squeeze the timeline to show only nonzero cash flows?

Accepted Answer

Every cash flow contains two pieces of i

Question 7

How do you calculate (mathematically)the present value (PV)of a(n):
(a)perpetuity
(b)annuity
(c)growing perpetuity
(d)growing annuity

Accepted Answer

@#IMG-DLM& (b)PV of an annuity

Question 8

Which of the following is TRUE about perpetuities?

Accepted Answer

A) Since a perpetuity generates cash flows every period infinitely,the cash flow generated equals the PV times the interest rate. 
B) Since a perpetuity generates cash flows every period infinitely,each cash flow must be discounted to calculate the present value. 
C) Since a perpetuity generates cash flows every period infinitely,there is no way to solve for the cash flow given the present value and the interest rate. 
D) A perpetuity does not generate cash flows every period infinitely. 
E) Since a perpetuity generate cash flows every period infinitely,the cash flow generated equals the PV divided by the interest rate. 
A) Since a perpetuity generates cash flows every period infinitely,the cash flow generated equals the PV times the interest rate. 
B) Since a perpetuity generates cash flows every period infinitely,each cash flow must be discounted to calculate the present value. 
C) Since a perpetuity generates cash flows every period infinitely,there is no way to solve for the cash flow given the present value and the interest rate. 
D) A perpetuity does not generate cash flows every period infinitely. 
E) Since a perpetuity generate cash flows every period infinitely,the cash flow generated equals the PV divided by the interest rate.

Question 9

Dan buys a property for $250,000.He is offered a 20-year loan by the bank,at an interest rate of 6% per year.What is the annual loan payment Dan must make?

Accepted Answer

A) $21,796.14 
B) $24,864.98 
C) $32,684.66 
D) $64,486.34 
E) $13,250.00 
A) $21,796.14 
B) $24,864.98 
C) $32,684.66 
D) $64,486.34 
E) $13,250.00

Question 10

An investor can invest $1000 at the start of a certain year,then $1000 the end of that year and the next year in a certain business.The business guarantees that the investor will receive a payment at the end of the year in five years.What is the future value (FV)of that payment if the investor is to break even,given that the discount rate over those five years is 6% per year?

Accepted Answer

A) $2002 
B) $2681 
C) $3000 
D) $3792 
E) $3370 
A) $2002 
B) $2681 
C) $3000 
D) $3792 
E) $3370

Question 11

A businessman wants to buy a truck.The dealer offers to sell the truck for either $120,000 now,or six yearly payments of $25,000.Which of the following is closest to the interest rate being offered by the dealer?

Accepted Answer

A) 5% 
B) 7% 
C) 9% 
D) 11% 
E) 8% 
A) 5% 
B) 7% 
C) 9% 
D) 11% 
E) 8%

Question 12

You have been offered the following investment opportunity: if you pay $2500 today,you will receive $1000 at the end of each of the next three years.Assuming that you could otherwise earn 10% per year on your money,the net present value (NPV)for this opportunity is closest to:

Accepted Answer

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

Question 13

A bank offers a home buyer a 25-year loan at 8% per year.If the home buyer borrows $120,000 from the bank,how much must be repaid every year?

Accepted Answer

A) $7896.45 
B) $9845.89 
C) $10,786.66 
D) $11,241.45 
E) $5,184.00 
A) $7896.45 
B) $9845.89 
C) $10,786.66 
D) $11,241.45 
E) $5,184.00

Question 14

A homeowner in a sunny climate has the opportunity to install a solar water heater in his home for a cost of $2400.After installation the solar water heater will produce a small amount of hot water every day,forever,and will require no maintenance.How much must the homeowner save on water heating costs every year if this is to be a sound investment? (The interest rate is 9% per year.)

Accepted Answer

A) $216 
B) $240 
C) $248 
D) $262 
E) $220 
A) $216 
B) $240 
C) $248 
D) $262 
E) $220

Question 15

Which of the following investments has the highest net present value (NPV),given that the interest rate is 5.5%?

Accepted Answer

A) one that pays $250 at the end of each of the next four years 
B) one that pays $500 at the end of next year and $500 in four years' time 
C) one that pays $250 at the end of next year and $750 in four years' time 
D) one that pays $200 at the end of next year,$200 at the end of the second year,and $300 at the end of the third and fourth years 
E) one that pays $250 at the beginning of each year for the next four years. 
A) one that pays $250 at the end of each of the next four years 
B) one that pays $500 at the end of next year and $500 in four years' time 
C) one that pays $250 at the end of next year and $750 in four years' time 
D) one that pays $200 at the end of next year,$200 at the end of the second year,and $300 at the end of the third and fourth years 
E) one that pays $250 at the beginning of each year for the next four years.

Question 16

To calculate the future value of an annuity,we divide the annuity formula by the appropriate discount factor.

Accepted Answer

A) True 
 B)False

Question 17

James is a law student who wishes to understand how a perpetuity works.His grandfather invested in a perpetual bond 25 years ago,which pays $15,000 annually at a 12% interest rate.What was the present value of the cash flows of this perpetuity when it was purchased?

Accepted Answer

A) $84,753.35 
B) $150,000 
C) $125,000 
D) $133,928.57 
E) $16,800 
A) $84,753.35 
B) $150,000 
C) $125,000 
D) $133,928.57 
E) $16,800

Question 18

A rich donor gives a hospital $100,000 one year from today.Each year after that,the hospital will receive a payment 5% larger than the previous payment,with the last payment occurring in ten years' time.What is the present value (PV)of this donation,given that the interest rate is 9%?

Accepted Answer

A) $467,922.22 
B) $585,987.27 
C) $772,173.49 
D) $779,843.27 
E) $1,120,727.79 
A) $467,922.22 
B) $585,987.27 
C) $772,173.49 
D) $779,843.27 
E) $1,120,727.79

Question 19

Kresta can invest in a scheme which will pay $10,000 at the end of each of the next four years.She must make an investment at the start of the first year of $32,000.Should she make this investment,given that the interest rate is 7%?

Accepted Answer

A) Yes,because the net present value (NPV)is negative. 
B) Yes,because the net present value (NPV)is positive. 
C) No,because the net present value (NPV)is negative 
D) No because the net present value (NPV)is positive. 
E) No,because the net present value (NPV)is zero. 
A) Yes,because the net present value (NPV)is negative. 
B) Yes,because the net present value (NPV)is positive. 
C) No,because the net present value (NPV)is negative 
D) No because the net present value (NPV)is positive. 
E) No,because the net present value (NPV)is zero.

Question 20

An annuity will pay you $1,000 per year for 30 years.What is the FV of this annuity at the end of 30 years,if your cost of capital is 3%?

Accepted Answer

A) $47,575 
B) $19,600 
C) $30,131 
D) $30,000 
E) $30,900 
A) $47,575 
B) $19,600 
C) $30,131 
D) $30,000 
E) $30,900

Exam 4: The Time Value of Money

A growing perpetuity where the rate of growth is greater than the discount rate will have an infinitely large present value (PV).

Consider the following timeline detailing a stream of cash flows: If the current market rate of interest is 10%,then the present value (PV)of this stream of cash flows is closest to:

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

What is the future value of this annuity?

Cash flows from an annuity occur every year in the future.

If a few intermediate cash flows in valuing a stream of cash flows are zero,can we delete those points on the timeline and squeeze the timeline to show only nonzero cash flows?

How do you calculate (mathematically)the present value (PV)of a(n): (a)perpetuity (b)annuity (c)growing perpetuity (d)growing annuity

Which of the following is TRUE about perpetuities?

Dan buys a property for $250,000.He is offered a 20-year loan by the bank,at an interest rate of 6% per year.What is the annual loan payment Dan must make?

A businessman wants to buy a truck.The dealer offers to sell the truck for either $120,000 now,or six yearly payments of $25,000.Which of the following is closest to the interest rate being offered by the dealer?

You have been offered the following investment opportunity: if you pay $2500 today,you will receive $1000 at the end of each of the next three years.Assuming that you could otherwise earn 10% per year on your money,the net present value (NPV)for this opportunity is closest to:

A bank offers a home buyer a 25-year loan at 8% per year.If the home buyer borrows $120,000 from the bank,how much must be repaid every year?

Which of the following investments has the highest net present value (NPV),given that the interest rate is 5.5%?

To calculate the future value of an annuity,we divide the annuity formula by the appropriate discount factor.

James is a law student who wishes to understand how a perpetuity works.His grandfather invested in a perpetual bond 25 years ago,which pays $15,000 annually at a 12% interest rate.What was the present value of the cash flows of this perpetuity when it was purchased?

A rich donor gives a hospital $100,000 one year from today.Each year after that,the hospital will receive a payment 5% larger than the previous payment,with the last payment occurring in ten years' time.What is the present value (PV)of this donation,given that the interest rate is 9%?

Kresta can invest in a scheme which will pay $10,000 at the end of each of the next four years.She must make an investment at the start of the first year of $32,000.Should she make this investment,given that the interest rate is 7%?

An annuity will pay you $1,000 per year for 30 years.What is the FV of this annuity at the end of 30 years,if your cost of capital is 3%?

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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