Question 1

-According to the Rule of 72,you can do which one of the following?

Accepted Answer

A)  double your money in five years at 7.2 percent interest 
B)  double your money in 7.2 years at 8 percent interest 
C)  double your money in 5 years at 14.4 percent interest 
D)  triple your money in 7.2 years at 5 percent interest 
E)  triple your money at 10 percent interest in 7.2 years 
A)  double your money in five years at 7.2 percent interest 
B)  double your money in 7.2 years at 8 percent interest 
C)  double your money in 5 years at 14.4 percent interest 
D)  triple your money in 7.2 years at 5 percent interest 
E)  triple your money at 10 percent interest in 7.2 years C

Question 2

-Assume the total cost of a college education will be $300,000 when your child enters college in 16 years.You presently have $75,561 to invest.What rate of interest must you earn on your investment to cover the cost of your child's college education?

Accepted Answer

A)  7.75 percent 
B)  8.50 percent 
C)  9.00 percent 
D)  9.25 percent 
E)  9.50 percent 
A)  7.75 percent 
B)  8.50 percent 
C)  9.00 percent 
D)  9.25 percent 
E)  9.50 percent C

Question 3

-Sixteen years ago,Alicia invested $500.Eight years ago,Travis invested $900.Today,both Alicia's and Travis' investments are each worth $2,400.Assume that both Alicia and Travis continue to earn their respective rates of return.Which one of the following statements is correct concerning these investments?

Accepted Answer

A)  Three years from today,Travis' investment will be worth more than Alicia's. 
B)  One year ago,Alicia's investment was worth more than Travis' investment. 
C)  Travis earns a higher rate of return than Alicia. 
D)  Travis has earned an average annual interest rate of 3.37 percent. 
E)  Alicia has earned an average annual interest rate of 6.01 percent. 
A)  Three years from today,Travis' investment will be worth more than Alicia's. 
B)  One year ago,Alicia's investment was worth more than Travis' investment. 
C)  Travis earns a higher rate of return than Alicia. 
D)  Travis has earned an average annual interest rate of 3.37 percent. 
E)  Alicia has earned an average annual interest rate of 6.01 percent. B

Question 4

-You would like to give your daughter $75,000 towards her college education 17 years from now.How much money must you set aside today for this purpose if you can earn 8 percent on your investments?

Accepted Answer

A)  $18,388.19 
B)  $20,270.17 
C)  $28,417.67 
D)  $29,311.13 
E)  $32,488.37 
A)  $18,388.19 
B)  $20,270.17 
C)  $28,417.67 
D)  $29,311.13 
E)  $32,488.37

Question 5

-Assume the average vehicle selling price in the United States last year was $41,996.The average price 9 years earlier was $29,000.What was the annual increase in the selling price over this time period?

Accepted Answer

A)  3.89 percent 
B)  4.20 percent 
C)  4.56 percent 
D)  5.01 percent 
E)  5.40 percent 
A)  3.89 percent 
B)  4.20 percent 
C)  4.56 percent 
D)  5.01 percent 
E)  5.40 percent

Question 6

-You expect to receive $9,000 at graduation in 2 years.You plan on investing this money at 10 percent until you have $60,000.How many years will it be until this occurs?

Accepted Answer

A)  18.78 years 
B)  19.96 years 
C)  21.90 years 
D)  23.08 years 
E)  25.00 years 
A)  18.78 years 
B)  19.96 years 
C)  21.90 years 
D)  23.08 years 
E)  25.00 years

Question 7

-One year ago,you invested $1,800.Today it is worth $1,924.62.What rate of interest did you earn?

Accepted Answer

A)  6.59 percent 
B)  6.67 percent 
C)  6.88 percent 
D)  6.92 percent 
E)  7.01 percent 
A)  6.59 percent 
B)  6.67 percent 
C)  6.88 percent 
D)  6.92 percent 
E)  7.01 percent

Question 8

You are considering two separate investments.Both investments pay 7 percent interest.Investment A pays simple interest and Investment B pays compound interest.Which investment should you choose,and why,if you plan on investing for a period of 5 years?

Accepted Answer

Simple interest is interest earned on th

Question 9

-You just received $225,000 from an insurance settlement.You have decided to set this money aside and invest it for your retirement.Currently,your goal is to retire 25 years from today.How much more will you have in your account on the day you retire if you can earn an average return of 10.5 percent rather than just 8 percent?

Accepted Answer

A)  $417,137 
B)  $689,509 
C)  $1,050,423 
D)  $1,189,576 
E)  $1,818,342 
A)  $417,137 
B)  $689,509 
C)  $1,050,423 
D)  $1,189,576 
E)  $1,818,342

Question 10

-Your older sister deposited $5,000 today at 8.5 percent interest for 5 years.You would like to have just as much money at the end of the next 5 years as your sister will have.However,you can only earn 7 percent interest.How much more money must you deposit today than your sister did if you are to have the same amount at the end of the 5 years?

Accepted Answer

A)  $321.19 
B)  $360.43 
C)  $387.78 
D)  $401.21 
E)  $413.39 
A)  $321.19 
B)  $360.43 
C)  $387.78 
D)  $401.21 
E)  $413.39

Question 11

Steve invested $100 two years ago at 10 percent interest.The first year,he earned $10 interest on his $100 investment.He reinvested the $10.The second year,he earned $11 interest on his $110 investment.The extra $1 he earned in interest the second year is referred to as:

Accepted Answer

A)  free interest. 
B)  bonus income. 
C)  simple interest. 
D)  interest on interest. 
E)  present value interest. 
A)  free interest. 
B)  bonus income. 
C)  simple interest. 
D)  interest on interest. 
E)  present value interest.

Question 12

Sue and Neal are twins.Sue invests $5,000 at 7 percent when she is 25 years old.Neal invests $5,000 at 7 percent when he is 30 years old.Both investments compound interest annually.Both Sue and Neal retire at age 60.Which one of the following statements is correct assuming that neither Sue nor Neal has withdrawn any money from their accounts?

Accepted Answer

A)  Sue will have less money when she retires than Neal. 
B)  Neal will earn more interest on interest than Sue. 
C)  Neal will earn more compound interest than Sue. 
D)  If both Sue and Neal wait to age 70 to retire,then they will have equal amounts of savings. 
E)  Sue will have more money than Neal as long as they retire at the same time. 
A)  Sue will have less money when she retires than Neal. 
B)  Neal will earn more interest on interest than Sue. 
C)  Neal will earn more compound interest than Sue. 
D)  If both Sue and Neal wait to age 70 to retire,then they will have equal amounts of savings. 
E)  Sue will have more money than Neal as long as they retire at the same time.

Question 13

-Suppose you are committed to owning a $140,000 Ferrari.You believe your mutual fund can achieve an annual rate of return of 8 percent and you want to buy the car in 7 years.How much must you invest today to fund this purchase assuming the price of the car remains constant?

Accepted Answer

A)  $74,208.16 
B)  $81,688.66 
C)  $87,911.08 
D)  $98,019.82 
E)  $99,446.60 
A)  $74,208.16 
B)  $81,688.66 
C)  $87,911.08 
D)  $98,019.82 
E)  $99,446.60

Question 14

Terry is calculating the present value of a bonus he will receive next year.The process he is using is called:

Accepted Answer

A)  growth analysis. 
B)  discounting. 
C)  accumulating. 
D)  compounding. 
E)  reducing. 
A)  growth analysis. 
B)  discounting. 
C)  accumulating. 
D)  compounding. 
E)  reducing.

Question 15

Tracy invested $1,000 five years ago and earns 4 percent interest on her investment.By leaving her interest earnings in her account,she increases the amount of interest she earns each year.The way she is handling her interest income is referred to as which one of the following?

Accepted Answer

A)  simplifying 
B)  compounding 
C)  aggregation 
D)  accumulation 
E)  discounting 
A)  simplifying 
B)  compounding 
C)  aggregation 
D)  accumulation 
E)  discounting

Question 16

You invested $1,400 in an account that pays 5 percent simple interest.How much more could you have earned over a 20-year period if the interest had compounded annually?

Accepted Answer

A)  $749.22 
B)  $830.11 
C)  $882.19 
D)  $901.15 
E)  $914.62 
A)  $749.22 
B)  $830.11 
C)  $882.19 
D)  $901.15 
E)  $914.62

Question 17

-You hope to buy your dream car four years from now.Today,that car costs $82,500.You expect the price to increase by an average of 4.8 percent per year over the next four years.How much will your dream car cost by the time you are ready to buy it?

Accepted Answer

A)  $98,340.00 
B)  $98,666.67 
C)  $99,517.41 
D)  $99,818.02 
E)  $100,023.16 
A)  $98,340.00 
B)  $98,666.67 
C)  $99,517.41 
D)  $99,818.02 
E)  $100,023.16

Question 18

Interest earned on both the initial principal and the interest reinvested from prior periods is called:

Accepted Answer

A)  free interest. 
B)  dual interest. 
C)  simple interest. 
D)  interest on interest. 
E)  compound interest. 
A)  free interest. 
B)  dual interest. 
C)  simple interest. 
D)  interest on interest. 
E)  compound interest.

Question 19

What lesson does the future value formula provide for young workers who are looking ahead to retiring some day?

Accepted Answer

The future value formula is:FV = PV (1 +

Question 20

At an interest rate of 10 percent and using the Rule of 72,how long will it take to double the value of a lump sum invested today? How long will it take after that until the account grows to four times the initial investment? Given the power of compounding,shouldn't it take less time for the money to double the second time?

Accepted Answer

It will take 7.2 years to double the ini

Exam 5: Introduction to Valuation: the Time Value of Money

-According to the Rule of 72,you can do which one of the following?

-Assume the total cost of a college education will be $300,000 when your child enters college in 16 years.You presently have $75,561 to invest.What rate of interest must you earn on your investment to cover the cost of your child's college education?

-You would like to give your daughter $75,000 towards her college education 17 years from now.How much money must you set aside today for this purpose if you can earn 8 percent on your investments?

-Assume the average vehicle selling price in the United States last year was $41,996.The average price 9 years earlier was $29,000.What was the annual increase in the selling price over this time period?

-You expect to receive $9,000 at graduation in 2 years.You plan on investing this money at 10 percent until you have $60,000.How many years will it be until this occurs?

-One year ago,you invested $1,800.Today it is worth $1,924.62.What rate of interest did you earn?

You are considering two separate investments.Both investments pay 7 percent interest.Investment A pays simple interest and Investment B pays compound interest.Which investment should you choose,and why,if you plan on investing for a period of 5 years?

Steve invested $100 two years ago at 10 percent interest.The first year,he earned $10 interest on his $100 investment.He reinvested the $10.The second year,he earned $11 interest on his $110 investment.The extra $1 he earned in interest the second year is referred to as:

-Suppose you are committed to owning a $140,000 Ferrari.You believe your mutual fund can achieve an annual rate of return of 8 percent and you want to buy the car in 7 years.How much must you invest today to fund this purchase assuming the price of the car remains constant?

Terry is calculating the present value of a bonus he will receive next year.The process he is using is called:

Tracy invested $1,000 five years ago and earns 4 percent interest on her investment.By leaving her interest earnings in her account,she increases the amount of interest she earns each year.The way she is handling her interest income is referred to as which one of the following?

You invested $1,400 in an account that pays 5 percent simple interest.How much more could you have earned over a 20-year period if the interest had compounded annually?

-You hope to buy your dream car four years from now.Today,that car costs $82,500.You expect the price to increase by an average of 4.8 percent per year over the next four years.How much will your dream car cost by the time you are ready to buy it?

Interest earned on both the initial principal and the interest reinvested from prior periods is called:

What lesson does the future value formula provide for young workers who are looking ahead to retiring some day?

Introduction to Corporate Finance

Financial Statements, Taxes, and Cash Flowpart Two: Financial Statements and Long-Term Financial Planning

Working With Financial Statements

Long-Term Financial Planning and Growthpart Three: Valuation of Future Cash Flows

Discounted Cash Flow Valuation

Interest Rates and Bond Valuation

Stock Valuationpart Four: Capital Budgeting

Net Present Value and Other Investment Criteria

Making Capital Investment Decisions

Project Analysis and Evaluationpart Five: Risk and Return

Some Lessons From Capital Market History

Return, Risk, and the Security Market Linepart Six: Cost of Capital and Long-Term Financial Policy

Cost of Capital

Raising Capital

Financial Leverage and Capital Structure Policy

Dividends and Payout Policypart Seven: Short-Term Financial Planning and Management

Short-Term Finance and Planning

Cash and Liquidity Management

Credit and Inventory Managementpart Eight: Topics in Corporate Finance

International Corporate Finance

Behavioral Finance: Implications for Financial Management

Enterprise Risk Management

Options and Corporate Finance

Option Valuation

Mergers and Acquisitions

Leasing

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