Question 1

Which of the following situations is best described by the timeline shown below?

Accepted Answer

A)  You make payments of $250 per month for six months. 
B)  You receive payments of $250 per month for six months. 
C)  You make payments of $250 per month for five months. 
D)  You receive payments of $250 per month for five months. 
A)  You make payments of $250 per month for six months. 
B)  You receive payments of $250 per month for six months. 
C)  You make payments of $250 per month for five months. 
D)  You receive payments of $250 per month for five months. A

Question 2

If the rate of interest (r) is 8%, then you should be indifferent about receiving $500.00 today or ________.

Accepted Answer

A)  $462.96 in one year 
B)  $500.00 in one year 
C)  $540.00 in one year 
D)  None of the above 
A)  $462.96 in one year 
B)  $500.00 in one year 
C)  $540.00 in one year 
D)  None of the above C

Question 3

A company intends to install new management software for its warehouse. The software will cost $47,000 to buy and will cost an additional $148,000 to install and implement. It is anticipated that it will save the company $44,000 through reductions in staff and $69,000 in general inventory costs in the first year after installation. What is the total benefit to the company in the first year if they choose to install the software?

Accepted Answer

A)  $56,500 
B)  $45,200 
C)  $113,000 
D)  $79,100 
A)  $56,500 
B)  $45,200 
C)  $113,000 
D)  $79,100 C

Question 4

To calculate a cash flow's present value (PV), you must compound it.

Accepted Answer

A) True 
 B)False

Question 5

What is the future value (FV) of $50,000 in thirty years, assuming the interest rate is 6% per year?

Accepted Answer

A)  $32,500.00 
B)  $244,098.38 
C)  $258,457.10 
D)  $287,174.56 
A)  $32,500.00 
B)  $244,098.38 
C)  $258,457.10 
D)  $287,174.56

Question 6

An investment will pay you $120 in one year and $200 in two years. If the interest rate is 4%, what is the present value of these cash flows?

Accepted Answer

A)  $304.91 
B)  $307.69 
C)  $300.29 
D)  $320.00 
A)  $304.91 
B)  $307.69 
C)  $300.29 
D)  $320.00

Question 7

How can we make a financial decision with cash flows occurring at different points in time?

Accepted Answer

We need to transform the cash flows to a

Question 8

Which of the following statements regarding the Law of One Price is INCORRECT?

Accepted Answer

A)  At any point in time, the price of two equivalent goods trading in different competitive markets will be the same. 
B)  One useful consequence of the Law of One Price is that when evaluating costs and benefits to compute a net present value (NPV), we can use any competitive price to determine a cash value, without checking the price in all possible markets. 
C)  If equivalent goods or securities trade simultaneously in different competitive markets, then they will trade for the same price in both markets. 
D)  An important property of the Law of One Price is that it holds even in markets where arbitrage is possible. 
A)  At any point in time, the price of two equivalent goods trading in different competitive markets will be the same. 
B)  One useful consequence of the Law of One Price is that when evaluating costs and benefits to compute a net present value (NPV), we can use any competitive price to determine a cash value, without checking the price in all possible markets. 
C)  If equivalent goods or securities trade simultaneously in different competitive markets, then they will trade for the same price in both markets. 
D)  An important property of the Law of One Price is that it holds even in markets where arbitrage is possible.

Question 9

Why is it usually necessary to use the time value of money when performing a cost-benefit analysis?

Accepted Answer

A)  For an investment project to be considered, costs must have a higher dollar value than benefits. 
B)  In most investment projects, costs are incurred up front, but benefits are received in the future. 
C)  For practical purposes, a dollar today may be considered to be equal to a dollar at some future time. 
D)  Although costs and benefits generally occur concurrently, the benefits will accrue value over time, due to interest. 
A)  For an investment project to be considered, costs must have a higher dollar value than benefits. 
B)  In most investment projects, costs are incurred up front, but benefits are received in the future. 
C)  For practical purposes, a dollar today may be considered to be equal to a dollar at some future time. 
D)  Although costs and benefits generally occur concurrently, the benefits will accrue value over time, due to interest.

Question 10

Explain why a dollar today is worth more than a dollar tomorrow.

Accepted Answer

A dollar today can be invested

Question 11

A lender lends $10,100, which is to be repaid in annual payments of $2070 for 6 years. Which of the following shows the timeline of the loan from the lender's perspective?

Accepted Answer

A)    
B)    
C)    
D)    
A)    
B)    
C)    
D)

Question 12

Cronus Airlines has a contract that gives them the opportunity to purchase up to 13,000,000 gallons of jet fuel at $2.00 per gallon. The current market price of jet fuel is $2.3 per gallon. Cronus believes they will only need 4,000,000 gallons of jet fuel. What is the value of this opportunity?

Accepted Answer

A)  $1,200,000 
B)  $3,900,000 
C)  $2,700,000 
D)  $9,000,000 
A)  $1,200,000 
B)  $3,900,000 
C)  $2,700,000 
D)  $9,000,000

Question 13

Use the information for the question(s) below.
   Coloma Cooper Incorporated is able to produce $640 worth of copper from one ton of low-grade copper ore. Because of its higher copper content, Coloma can produce $940 worth of copper from one ton of high-grade copper ore.
-A company that manufactures copper piping is offering to trade you 5,925 tons of low-grade copper ore for 4,000 tons of high-grade copper ore. Assuming you currently have 4,000 tons of high-grade ore, what are the total benefits and added benefits of taking the trade?

Accepted Answer

Total Benefits
No trade and refine high-

Question 14

If money is invested at 8% per year, after approximately how many years will the interest earned be equal to the original investment?

Accepted Answer

A)  7 years 
B)  8 years 
C)  9 years 
D)  11 years 
A)  7 years 
B)  8 years 
C)  9 years 
D)  11 years

Question 15

Jeff has the opportunity to receive lump-sum payments either now or in the future. Which of the following opportunities is the best, given that the interest rate is 4% per year?

Accepted Answer

A)  one that pays $900 now 
B)  one that pays $1080 in two years 
C)  one that pays $1350 in five years 
D)  one that pays $1620 in ten years 
A)  one that pays $900 now 
B)  one that pays $1080 in two years 
C)  one that pays $1350 in five years 
D)  one that pays $1620 in ten years

Question 16

Which of the following best explains why market prices are useful to a financial manager when performing a cost-benefit analysis?

Accepted Answer

A)  They can be used to determine how much an asset can be sold for. 
B)  They can be used to convert different services and commodities into equivalent cash values which can be compared. 
C)  They allow all commodities and services to be assigned a fixed and unchanging value. 
D)  They can be evaluated to determine whether the market in which the manager exchanges goods and services offers true value. 
A)  They can be used to determine how much an asset can be sold for. 
B)  They can be used to convert different services and commodities into equivalent cash values which can be compared. 
C)  They allow all commodities and services to be assigned a fixed and unchanging value. 
D)  They can be evaluated to determine whether the market in which the manager exchanges goods and services offers true value.

Question 17

A manufacturer of breakfast cereals has the opportunity to purchase barley at $3.00 a bushel for 10,000 bushels, if it also buys 5,000 bushels of wheat at $16.00 per bushel. However, the manufacturer does not use any barley in its products, and currently needs 20,000 bushels of wheat. If the current market price of barley is $3.80 per bushel and that of wheat is $15.80 per bushel, should this opportunity be taken, and why?

Accepted Answer

A)  Because the company has no need of barley, the opportunity should not be taken. 
B)  Because the opportunity does not meet the company's need for wheat, the opportunity should not be taken. 
C)  Because the value of the opportunity is positive, the opportunity should be taken. 
D)  Because the value of the opportunity is negative, the opportunity should not be taken. 
A)  Because the company has no need of barley, the opportunity should not be taken. 
B)  Because the opportunity does not meet the company's need for wheat, the opportunity should not be taken. 
C)  Because the value of the opportunity is positive, the opportunity should be taken. 
D)  Because the value of the opportunity is negative, the opportunity should not be taken.

Question 18

Which of the following best describes the valuation principle?

Accepted Answer

A)  It is not possible to compare costs and benefits that occur at different points in time, in different currencies, or with different risks. 
B)  The value of a commodity or an asset to a firm or its investors is determined by its competitive market price. When the value of the benefits exceeds the value of the costs in terms of market prices, the decision will increase the market value of the firm. 
C)  The rate at which we can exchange money today for money in the future by borrowing or investing is the current market interest rate and is same across all banks. 
D)  If equivalent goods or securities trade simultaneously in different markets across the world, they will trade for the same price. 
A)  It is not possible to compare costs and benefits that occur at different points in time, in different currencies, or with different risks. 
B)  The value of a commodity or an asset to a firm or its investors is determined by its competitive market price. When the value of the benefits exceeds the value of the costs in terms of market prices, the decision will increase the market value of the firm. 
C)  The rate at which we can exchange money today for money in the future by borrowing or investing is the current market interest rate and is same across all banks. 
D)  If equivalent goods or securities trade simultaneously in different markets across the world, they will trade for the same price.

Question 19

What is one of the prerequisite conditions for the Valuation Principle to work?

Accepted Answer

The availability of competitiv

Question 20

Why is the personal decision a financial manager makes as to whether to buy or to rent an apartment as a personal residence most like the professional decision that manager makes as to whether her firm should try to acquire a stake in a fast growing new Internet-based company?

Accepted Answer

A)  Both decisions involve the purchase of assets that are essential for the existence of the investor. 
B)  Both decisions involve the rental of a useful asset. 
C)  Both decisions have the potential to affect the firm. 
D)  Both decisions should be made based upon the tradeoff benefits and costs across time. 
A)  Both decisions involve the purchase of assets that are essential for the existence of the investor. 
B)  Both decisions involve the rental of a useful asset. 
C)  Both decisions have the potential to affect the firm. 
D)  Both decisions should be made based upon the tradeoff benefits and costs across time.

Exam 3: Time Value of Money: an Introduction

Which of the following situations is best described by the timeline shown below?

If the rate of interest (r) is 8%, then you should be indifferent about receiving $500.00 today or ________.

To calculate a cash flow's present value (PV), you must compound it.

What is the future value (FV) of $50,000 in thirty years, assuming the interest rate is 6% per year?

An investment will pay you $120 in one year and $200 in two years. If the interest rate is 4%, what is the present value of these cash flows?

How can we make a financial decision with cash flows occurring at different points in time?

Which of the following statements regarding the Law of One Price is INCORRECT?

Why is it usually necessary to use the time value of money when performing a cost-benefit analysis?

Explain why a dollar today is worth more than a dollar tomorrow.

A lender lends $10,100, which is to be repaid in annual payments of $2070 for 6 years. Which of the following shows the timeline of the loan from the lender's perspective?

Cronus Airlines has a contract that gives them the opportunity to purchase up to 13,000,000 gallons of jet fuel at $2.00 per gallon. The current market price of jet fuel is $2.3 per gallon. Cronus believes they will only need 4,000,000 gallons of jet fuel. What is the value of this opportunity?

If money is invested at 8% per year, after approximately how many years will the interest earned be equal to the original investment?

Jeff has the opportunity to receive lump-sum payments either now or in the future. Which of the following opportunities is the best, given that the interest rate is 4% per year?

Which of the following best explains why market prices are useful to a financial manager when performing a cost-benefit analysis?

Which of the following best describes the valuation principle?

What is one of the prerequisite conditions for the Valuation Principle to work?

Why is the personal decision a financial manager makes as to whether to buy or to rent an apartment as a personal residence most like the professional decision that manager makes as to whether her firm should try to acquire a stake in a fast growing new Internet-based company?

Corporate Finance and the Financial Manager

Introduction to Financial Statement Analysis

Time Value of Money: Valuing Cash Flow Streams

Interest Rates

Bonds

Stock Valuation

Investment Decision Rules

Fundamentals of Capital Budgeting

Stock Valuation: a Second Look

Risk and Return in Capital Markets

Systematic Risk and the Equity Risk Premium

The Cost of Capital

Raising Equity Capital

Debt Financing

Capital Structure

Payout Policy

Financial Modeling and Pro Forma Analysis

Working Capital Management

Short-Term Financial Planning

Option Applications and Corporate Finance

Mergers and Acquisitions

International Corporate Finance

Leasing

Insurance and Risk Management

Corporate Governance

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