Deck 5: The Time Value of Money

Question 1

Rekka Resin Moulding Inc purchases a building and equipment for $2 million. It puts $500,000 down and finances the rest over five years making quarterly payments starting one quarter from now. Interest is 8% per year, compounded quarterly. What is the quarterly payment?

A) $318,241
B) $375,686
C) $122,314
D) $152,779
E) $91,735

Answer 1

E

Question 2

Tuscarora Transportation recently signed a seven-year loan of $350,000 with annual payments at the end of each year on four warehouses and the adjacent paved acreage at a 9% interest rate compounded annually. What is the total interest that will be paid by the end of the seven-year term?

A) $136,792
B) $668,450
C) $754,950
D) $1,761,550
E) $2,450,000

Answer 2

A

Question 3

Ambidex Ltd. established five years ago, was capitalized with $4.5 million from the sale of common shares. The company retained 100% of its earnings through that period. This year Ambidex Ltd. declared a dividend which provided common shareholders with a return of 12% compounded annually. What was the amount of the dividend declared?

A) $3,429,000
B) $7,929,000
C) $792,900
D) $2,553,435
E) $255,343

Answer 3

A

Question 4

In three years time, the Company estimates that they will need $10 million to build and equip a new plant. To achieve this target amount with a one-time investment today, how much cash would the company have to invest if the return is 12% compounded annually?

A) $6,788,000
B) $7,118,000
C) $7,513,100
D) $8,242,000
E) $14,049,000

Question 5

If the principal of a bank loan is $20,000, the interest rate is 9% compounded annually and the maturity date is in 10 years, what would the total payment be if none of the principal was paid back before the maturity date?

A) $4,734
B) $51,880
C) $53,640
D) $43,440
E) $47,348

Question 6

The Board of Directors of Peterson Enterprises wishes to fire the Chief Financial Officer (CFO). As part of the settlement, the company will give the CFO a check equivalent to three years worth of salary. In calculating what the future salary will be worth today, the Directors are

A) Compounding the stream of salary payments
B) Amortizing the value of the salary over five years
C) Determining the value of an annuity
D) Discounting the stream of salary payments
E) Calculating the future value of the stream of payments

Question 7

Jeanine withdrew $10,000 from an aggressive growth mutual fund, which returned 9.8% over the last 12 months. The funds were provided in exchange for a promissory note from her son's business to finance its expansion. The business has operated for five years and has no other debt. Inflation has been holding steady at 3.2%. The Canadian dollar, is at $1.015 to $1.00 US. Least risk, government securities are paying out 4.5%. If she believes that 1.5% will cover her risk exposure, what rate is the minimum she should realistically charge her son's business?

A) 9.8%
B) 4.5%
C) 8.2%
D) 6.0%
E) 3.2%

Question 8

If the Company is required to make equal monthly payments into a sinking fund that will be used to pay off the amount that will be due at maturity of their bond issue and they wish to calculate what that payment will be, they will be determining

A) The present value of a lump sum
B) An ordinary annuity
C) The future value of a lump sum
D) An annuity due
E) The future value of an uneven stream of payments

Question 9

CapiCal Industries is issuing bonds at 7% interest but would be willing to buy back the debt at any time after the first 12 months. CapiCal Industries is looking to issue

A) A Retractable bond
B) A Debenture
C) A Redeemable bond
D) An Open bond
E) A convertible debenture

Question 10

2,500 bonds with a term of five years, and a coupon rate of 7%, compounded annually, with payments once a year, and a face value of $1000, were issued November 1. What is the total amount that the company will have paid out at the bonds maturity?

A) $5,032,125
B) $3,375,000
C) $1,623,866
D) $3,587,675
E) $1,232,125

Question 11

Which of the following best describes the financial loss involved in choosing a less profitable option?

A) Marginal Cost
B) Suboptimization
C) Opportunity Cost
D) Interest Loss
E) Terminal Loss

Question 12

Galhadi Telecommunications Ltd. can finance the purchase of $650,000 worth of electronic infrastructure by a bank loan where both principal and interest are paid at the end of the term. The interest rate being offered is 10%, compounded annually, maturing in 5 years. Alternatively, the company can enter into a lease to buy arrangement, where the interest rate is also 10% per year, compounded annually and payments of $158,442 are made at the beginning of each year for five years. Which is the better financial alternative and by how much?

A) The lease to buy saves a $68,189 in total interest paid.
B) The bank loan saves $153,054 in total interest paid.
C) The lease to buy saves $153,054 in total interest paid.
D) The bank loan has a lower present value cost by $49,378.
E) The bank loan has a lower present value cost of $10,687.

Question 13

Fandango Company's credit terms allow its customers to pay invoices in 30 days. Practice has not followed policy and the collection period is at 45 days. If Fandango's receivables are $164,565 and the company can earn 12% on capital invested, what is the opportunity cost it is experiencing by not adhering to their collection policy?

A) $19,747.80
B) $6,582.60
C) $13,165.20
D) $61,437.60
E) $8,776.80

Question 14

A large Ontario municipality signed a four-year lease on paving equipment where payments of $71,698 are made at the beginning of each year with an interest rate of 10% per year, compounded annually. By the end of the contract, what will be the total cost to the city?

A) $366,025
B) $332,750
C) $337,697
D) $371,467
E) $383,550

Question 15

Gerald Electric Company will only sell a piece of switching equipment on credit if the customer puts $10,000 down. The balance of $40,000 can be paid at the end of 12 months. What amount should Gerald Electric be willing to accept today if the customer is willing to make the entire payment immediately. The company's credit terms are 14% per year compounded annually.

A) $3,508
B) $34,782
C) $35,088
D) $43,859
E) $45,088

Question 16

Tuscarora Transportation is expected to require $450,000 to replace part of their fleet trucks in six years time. What yearly contribution at the end of each year will the company have to make to an investment paying 12% per annum to have sufficient money to purchase the trucks?

A) $55,453
B) $71,603
C) $227,964
D) $905,400
E) $759,150

Question 17

Rekka Resin Moulding Inc.'s earnings before tax (EBT) has declined between 3% and 7% in each of the past five quarters. The company is trying to finance the purchase of a $55,000 injection moulding machine. The Kelowna-Picton Credit Union has made the best offer at 8.5%, 2.5% over Prime. At the same time, Penticton Injection Inc. a company with steady earnings growth, has received financing for a similar project with the loan provided at .75% under Prime. Due to its declining earnings Rekka will be facing

A) A risk premium of 3.25%
B) An opportunity cost of $4,675
C) A risk premium of $4,675
D) An opportunity cost of 3.25%
E) An opportunity cost of 2.5%

Question 18

An accelerated monthly mortgage is one where the payments are made at the beginning of the month. This form of payment is called

A) An ordinary annuity
B) A general annuity
C) An annuity due
D) A pre-paid annuity
E) A post-paid annuity

Question 19

When Pickton Furniture offers customers two years to pay for a $4,500 bedroom suite, it uses an implicit interest rate of 16%. Furniture paid in cash is priced net of financing. How much would a couple save if they borrowed against their credit line so they could pay cash for the suite and then paid off the line in a lump sum at the end of two years? The credit line carries an interest rate of 9% per year compounded annually.

A) $1,234
B) $1,156
C) $629
D) $526
E) $598

Question 20

Ambidex is considering a bank loan of $1,800,000 to update its information system technology. It is expecting to finance the loan over five years, with annual payments, at an interest rate of 12%, compounded annually. Which of the following would provide the least cost alternative to Ambidex?

A) Maintain the current terms.
B) Make a down payment of 5% of the principle.
C) Spread the payments over eight years instead of five years.
D) Pay at the beginning, instead of at the end of the year.
E) Make quarterly payments instead of annual ones.

Question 21

What is the maximum price Genome Inc. can pay for a machine that is expected to produce marginal revenues of $20,000, $25,000, $30,000, $35,000, and $40,000 at the beginning of each year for five years if the interest rate is 10%?

A) $100,111
B) $110,122
C) $113,724
D) $121,137
E) $150,000

Question 22

What payment does Nick Huntley have to make monthly to a savings fund that returns 8%, compounded quarterly, if he wishes to buy out his partner when she retires in 3 years and his partner expects to receive $100,000 for her shares in their business?

A) $3,152
B) $3,349
C) $11,558
D) $11,784
E) $12,934

Question 23

If a contract specifies lease payments of $1,250 to be made at the beginning of each quarter for the next four years, what lump sum payment at the beginning of the lease should satisfy the landlord, if interest rates are at 12%, compounded quarterly?

A) $16,172
B) $4,252
C) $15,701
D) $17,009
E) $17,585

Question 24

A bond with the term of 20 years, face value of $5,000, a coupon rate of 8%, compounded quarterly and payments 4 times a year, was issued 15 years ago. Currently, interest rates are at 12%. What could the bond be sold for today?

A) $4,279
B) $4,471
C) $4,853
D) $5,047
E) $4,256

Question 25

Another phrase for fair value of a bond is

A) Book value of the bond
B) Adjusted value of the bond
C) Market value of the bond
D) Projected value of a bond
E) Face value of a bond

Question 26

Debentures are

A) Unsecured bonds
B) A form of equity
C) Convertible bonds
D) Loans from governments
E) Government grants

Question 27

PT&T Inc. has signed a lease for a manufacturing facility and will make a $123,552 payment twice a year at the beginning of each period for 10 years. If the interest being charged is 14%, what is the total amount of interest PT&T will pay by the end of the contract?

A) $500,836
B) $1,070,506
C) $1,162,624
D) $1,488,125
E) $2,594,036

Question 28

Bottomly Industries has entered a capital lease with a financial institution for a warehouse on a small parcel of land. If the interest rate being charged is 12%, compounded every 2 months, and Bottomly will be making payments of $24,083 at the beginning of every two months [six times a year] for five years, what is the historical cost value of the asset that will appear on the Company's balance sheet?

A) $86,814
B) $193,993
C) $325,667
D) $539,375
E) $550,162

Question 29

Five years ago John Henry set aside $5,000 in a separate bank account to be used for his favourite hobby - betting on horses at the race track. This account now has a $10,000 balance. What is the approximate compound interest rate John Henry's hobby is earning?

A) 2.9%
B) 6.9%
C) 10.0%
D) 14.4%
E) 100.0%

Question 30

Millennium Laboratories can license one of its patented pharmaceutical products to a Japanese company for a five-year period. Millennium would like to insure that the fee it charges to the Japanese company will return no less than what the company projects it could have made had it marketed the product itself. Millennium believes it could have achieved a minimum of $400,000 in the first year, $10,500,000 in the second year, and $50 million, $65 million and $65 million at the end of each year. Given that interest rates are at 9%, what up-front fee paid immediately should Millennium charge?

A) $122,508,000
B) $136,107,000
C) $148,357,000
D) $157,502,000
E) $190,900,000

Question 31

The Export Development Corp. (EDC) offered a $500,000 startup loan to qualifying entrepreneurs. For year one of the loan, it was interest and payment free. Subsequently, there was a two-year period where interest only payments were made at the end of each year. In Year 4, both interest and principal payments were made. The loan had to be repaid at the end of Year 8. If the interest rate charged in years 2 through 8 remained at 8% compounded annually, what was the total interest paid on the entire EDC loan.

A) $33,026
B) $32,000
C) $246,894
D) $120,494
E) $206,143

Question 32

As a bond approaches within weeks of its maturity date, its market price

A) Approaches zero
B) Rises or drops below the face value of the bond based on current interest rates
C) Is equal to the face value of the bond plus the total interest earned
D) Approaches the face value of the bond
E) Is equal to the future value of the stream of interest payments

Question 33

Which of the following, under most circumstances, would be paid with an annuity due?

A) Bank loan
B) Warehouse lease
C) Debt interest
D) Amortization expense
E) Dividend on preferred shares

Question 34

CapiCal Enterprises is transforming some of their fossil fuel based processes to those being driven by wind turbines. Based on extensive meteorological data, the following savings have been projected for the next five years: $850,000, $680,000, $995,000, $778,000 and $900,000. If interest rates are at 7% compounded annually and the company is willing to invest all the savings in the green technology, what would it be willing to pay today for the reengineering?

A) $2,657,332
B) $5,506,501
C) $3,435,778
D) $14,477,104
E) $8,989,341

Question 35

Which of the following is the best description of the Rule of 72?

A) The Rule of 72 tells how what an investment is worth when interest rates are expected to double.
B) The Rule of 72 tells how what interest rates are when an investment is expected to triple.
C) The Rule of 72 tells how long it takes an investment to triple at a given interest rate.
D) The Rule of 72 tells how what interest rates are when an investment is expected to double.
E) The Rule of 72 tells how long it takes an investment to double at a given interest rate.

Question 36

What is the maximum price XL Satellites can pay for a machine that is expected to produce marginal revenues of $20,000, $25,000, $30,000, $35,000, and $40,000 at the end of each year for five years if the interest rate is 10%?

A) $100,111
B) $110,122
C) $113,724
D) $121,137
E) $150,000

Question 37

A bond with a term of 20 years, a coupon rate of 8% paid at the end of every year and a face value of $1,000 was purchased November 1. By November 2nd interest rates had dropped to 6%. What is the selling price of the bond on November 2nd?

A) $12,387
B) $11,495
C) $1,229
D) $771
E) $337

Question 38

What quarterly payment at the beginning of each period for ten years should Mountain Leasing charge for a $100,000 chalet when interest rates are 12%?

A) $3,000
B) $5,040
C) $5,190
D) $18,960
E) $21,240

Question 39

Magenta Oil and Gas Exploration Inc. is issuing a $25 million, 10% bonds to partially finance a refining facility. There are no assets pledged against it for security. This type of financing is called a/an

A) Debenture
B) Limited bond
C) Unlimited liability
D) Unsecured mortgage
E) Open ended loan

Question 40

Millennium Laboratories can license one of its patented pharmaceutical products to a Japanese company for a five-year period. Millennium would like to insure that the fee it charges to the Japanese company will return no less than what the company projects it could have made had it marketed the product itself. Millennium believes it could have achieved a minimum of $400,000 in the first year, $10,500,000 in the second year, and $50 million, $65 million and $65 million at the end of each year. Given that interest rates are at 9%, what fee paid at the beginning of each year, should Millennium charge?

A) $110,700,000
B) $124,100,000
C) $63,600,000
D) $32,100,000
E) $20,900,000

Question 41

Next year interest rates are expected to be 8% and the price of a barrel of oil is expected to $110. The corresponding figures for the current year are 6% and $100. Assuming that long term interest rates in a stable economic environment are 4%, which of the following statements best expresses expected inflation levels for next year?

A) Inflation is expected to rise 2% next year.
B) Inflation is expected to rise 4% next year.
C) Inflation is expected to rise 10% next year.
D) Inflation is expected to rise 25% next year.
E) Inflation is expected to rise 100% next year.

Question 42

Maple Cloud Services Inc. is considering the development a brand new type of cloud computing server that requires $85,000 to be spent at the end of each of the next six years. Revenues of $100,000 per year for five years start at the end of the of the second year. Should Maple pursue this opportunity?

A) No, because the Maple will be $21,960 worse off after at the end of the investment period.
B) No, because the Maple will be $10,000 worse off after at the end of the investment period.
C) No, because the Maple will only break even by the end of the investment period.
D) Yes, because the Maple will be $4,870 better off after at the end of the investment period.
E) Yes, because the Maple will be $75,000 better off after at the end of the investment period.

Question 43

A $1,000 bond with 6% semi-annual coupon payments and a maturity date of 10 years is quoted at $864.11. What is the current interest rate?

A) 2%
B) 4%
C) 6%
D) 8%
E) 10%

Question 44

Jameson Insurance invests $100,000 for five years in a guaranteed investment certificate that pays 4% interest compounded quarterly. How much interest will Jameson earn over that period?

A) $5,100
B) $18,050
C) $21,670
D) $22,020
E) $119,110