Question 1

Which of the following statements is FALSE about valuing cash at different points in time?

Accepted Answer

A)  The process of moving forward along the timeline to determine a cash flow's value in the future is known as compounding. 
B)  The effect of earning interest on interest is known as compound interest. 
C)  It is only possible to compare or combine values at the same point in time. 
D)  A dollar in the future is worth more than a dollar today. 
A)  The process of moving forward along the timeline to determine a cash flow's value in the future is known as compounding. 
B)  The effect of earning interest on interest is known as compound interest. 
C)  It is only possible to compare or combine values at the same point in time. 
D)  A dollar in the future is worth more than a dollar today.

Question 2

A firm has contracted to supply 500,000 gallons of propane fuel for $1.46 million to the local municipality. The municipality wants to break the contract. What does the minimum current market price of propane need to be in order for the firm to benefit from breaking the contract?

Accepted Answer

A)  greater than $2.90 per gallon 
B)  greater than $2.92 per gallon 
C)  greater than $2.94 per gallon 
D)  greater than $2.96 per gallon 
A)  greater than $2.90 per gallon 
B)  greater than $2.92 per gallon 
C)  greater than $2.94 per gallon 
D)  greater than $2.96 per gallon

Question 3

The one-year discount factor is the discount at which we can purchase money in the future, one year from now.

Accepted Answer

A) True 
 B)False

Question 4

If $17,000 is invested at 10% per year, in approximately how many years will the investment double?

Accepted Answer

A)  7.3 years 
B)  8.4 years 
C)  11.0 years 
D)  14.6 years 
A)  7.3 years 
B)  8.4 years 
C)  11.0 years 
D)  14.6 years

Question 5

The rule of 72 tells you approximately how long it takes for money invested at a given rate of compound interest to double in value.

Accepted Answer

A) True 
 B)False

Question 6

Use the information for the question(s) below.   As an oil refiner, you are able to produce $76 worth of unleaded gasoline from one barrel of Alaska North Slope (ANS) crude oil. Because of its lower sulfur content, you can produce $77 worth of unleaded gasoline from one barrel of West Texas Intermediate (WTI) crude.
Assuming you just purchased 9950 bbl of WTI crude at the current market price, the total revenue (cost) to you if you were to refine this crude oil and sell the unleaded gasoline is closest to ________.

Accepted Answer

A)  ($766,150) 
B)  $766,150 
C)  ($770,032) 
D)  $770,032 
A)  ($766,150) 
B)  $766,150 
C)  ($770,032) 
D)  $770,032

Question 7

What is the present value (PV) of $90,000 received six years from now, assuming the interest rate is 5% per year?

Accepted Answer

A)  $58,500.00 
B)  $57,085.48 
C)  $67,159.39 
D)  $117,528.93 
A)  $58,500.00 
B)  $57,085.48 
C)  $67,159.39 
D)  $117,528.93

Question 8

If the interest rate is 9%, the one-year discount factor is equal to ________.

Accepted Answer

A)  0.090 
B)  1.090 
C)  0.917 
D)  0.981 
A)  0.090 
B)  1.090 
C)  0.917 
D)  0.981

Question 9

Consider the following timeline:   If the current market rate of interest is 7%, then the value as of year 1 is closest to ________.

Accepted Answer

A)  $0 
B)  $1000 
C)  $570 
D)  $68 
A)  $0 
B)  $1000 
C)  $570 
D)  $68

Question 10

Stella deposits $4500 in a savings account at a bank that offers interest of 4.7% on such accounts. What is the value of the money in her savings account in one year's time?

Accepted Answer

A)  $4298 
B)  $212 
C)  $4712 
D)  $6597 
A)  $4298 
B)  $212 
C)  $4712 
D)  $6597

Question 11

On Commodity Exchange A, it is possible to buy and sell crude oil at $116 per barrel, while on Commodity Exchange B crude oil can be bought and sold at $117 per barrel. If there are transaction costs of 1% when buying or selling on either exchange, what is the net effect of buying a barrel of oil on Exchange A and selling it on Exchange B?

Accepted Answer

A)  -$1.33 
B)  -$0.67 
C)  $1.06 
D)  $1.60 
A)  -$1.33 
B)  -$0.67 
C)  $1.06 
D)  $1.60

Question 12

Use the information for the question(s) below.   As an oil refiner, you are able to produce $77 worth of unleaded gasoline from one barrel of Alaska North Slope (ANS) crude oil. Because of its lower sulfur content, you can produce $78 worth of unleaded gasoline from one barrel of West Texas Intermediate (WTI) crude.
Assuming you currently have 10,000 bbl of WTI crude, the total benefits to you if you were to sell the 10,000 bbl of WTI crude and use the proceeds to purchase and refine ANS crude is closest to ________.

Accepted Answer

A)  $794,274 
B)  $780,000 
C)  $781,550 
D)  $784,091 
A)  $794,274 
B)  $780,000 
C)  $781,550 
D)  $784,091

Question 13

Is there a need to distinguish between cash inflows and outflows on a timeline?

Accepted Answer

Cash inflows and outflows should have op

Question 14

A dollar today and a dollar in one year may be considered to be equivalent.

Accepted Answer

A) True 
 B)False

Question 15

In order to distinguish between inflows and outflows, different colors are assigned to each of these cash flows when constructing a timeline.

Accepted Answer

A) True 
 B)False

Question 16

Whenever a good trades in a competitive market, the ________ determines the value of the good.

Accepted Answer

A)  supply 
B)  price 
C)  demand 
D)  cost 
A)  supply 
B)  price 
C)  demand 
D)  cost

Question 17

Like other metals, uranium 308 is traded in competitive markets like the New York Metals Exchange. Which of the following would value a given weight of uranium 308 the most?

Accepted Answer

A)  a power station that uses uranium 308 to produce electrical energy 
B)  a metals trader who stockpiles and sells actual physical quantities of uranium 308 
C)  a speculator who buys and sells uranium 308 on the market without ever using the metal 
D)  All buyers and sellers would have the same value for 250 pounds of uranium 308. 
A)  a power station that uses uranium 308 to produce electrical energy 
B)  a metals trader who stockpiles and sells actual physical quantities of uranium 308 
C)  a speculator who buys and sells uranium 308 on the market without ever using the metal 
D)  All buyers and sellers would have the same value for 250 pounds of uranium 308.

Question 18

A coin collector treasures his 1969-S doubled die obverse Lincoln cent because he found it in his pocket change, rather than purchasing it. He can sell it on the open market for $35,000, but would only sell it for at least twice that price, due to its sentimental value to him. It is anticipated that the coin will increase in market value in the foreseeable future. What is the value of the coin?

Accepted Answer

A)  $0.01, since he paid nothing to obtain the coin and it has a face value of one cent. 
B)  $35,000, since this is the price that the coin would fetch on the open market. 
C)  At least $35,000, since he could replace the coin for $35,000, but the coin he owns has additional intangible value due to its sentimental value. 
D)  At least $35,000, since the value of the coin will increase in the future. 
A)  $0.01, since he paid nothing to obtain the coin and it has a face value of one cent. 
B)  $35,000, since this is the price that the coin would fetch on the open market. 
C)  At least $35,000, since he could replace the coin for $35,000, but the coin he owns has additional intangible value due to its sentimental value. 
D)  At least $35,000, since the value of the coin will increase in the future.

Question 19

A company decides to close down its plastics division. It has on hand 20 tons of styrene monomer, a raw material that has a market price of $800 per ton, which had been originally purchased at $750 per ton. Given that the company has no use for the styrene monomer, and that it would cost the company $5200 to store it, what is the total value of the 20 tons of styrene monomer to the company?

Accepted Answer

A)  -$5200 
B)  $0 
C)  $15,000 
D)  $16,000 
A)  -$5200 
B)  $0 
C)  $15,000 
D)  $16,000

Question 20

You are scheduled to receive $10,000 in one year. What will be the effect of an increase in the interest rate on the future value of this cash flow?

Accepted Answer

A)  It will cause the future value to fall. 
B)  It will cause the future value to rise. 
C)  It will have no effect on the future value. 
D)  The effect cannot be determined with the information provided. 
A)  It will cause the future value to fall. 
B)  It will cause the future value to rise. 
C)  It will have no effect on the future value. 
D)  The effect cannot be determined with the information provided.

Exam 3: Time Value of Money: an Introduction

Which of the following statements is FALSE about valuing cash at different points in time?

A firm has contracted to supply 500,000 gallons of propane fuel for $1.46 million to the local municipality. The municipality wants to break the contract. What does the minimum current market price of propane need to be in order for the firm to benefit from breaking the contract?

The one-year discount factor is the discount at which we can purchase money in the future, one year from now.

If $17,000 is invested at 10% per year, in approximately how many years will the investment double?

The rule of 72 tells you approximately how long it takes for money invested at a given rate of compound interest to double in value.

What is the present value (PV) of $90,000 received six years from now, assuming the interest rate is 5% per year?

If the interest rate is 9%, the one-year discount factor is equal to ________.

Consider the following timeline: If the current market rate of interest is 7%, then the value as of year 1 is closest to ________.

Stella deposits $4500 in a savings account at a bank that offers interest of 4.7% on such accounts. What is the value of the money in her savings account in one year's time?

Is there a need to distinguish between cash inflows and outflows on a timeline?

A dollar today and a dollar in one year may be considered to be equivalent.

In order to distinguish between inflows and outflows, different colors are assigned to each of these cash flows when constructing a timeline.

Whenever a good trades in a competitive market, the ________ determines the value of the good.

Like other metals, uranium 308 is traded in competitive markets like the New York Metals Exchange. Which of the following would value a given weight of uranium 308 the most?

You are scheduled to receive $10,000 in one year. What will be the effect of an increase in the interest rate on the future value of this cash flow?

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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