Deck 5: Discounted Cash Flow Valuation

Question 1

Which one of the following is generally valued as a perpetuity?

A)short-term bond
B)long-term bond
C)non-dividend paying share
D)ordinary share paying increasing dividends
E)preferred stock

Answer 1

preferred stock

Question 2

A pure discount loan can be defined as:

A)the present value of a stream of payments to be paid over a period of time in the future
B)the present value of a series of interest payments plus one single principal payment in the future
C)the present value of a single lump sum to be repaid at some time in the future
D)the single lump sum future value of a series of payments over a stated period of time
E)the future value of a series of interest payments plus one single loan amount paid at the beginning of the period

Answer 2

the present value of a single lump sum to be repaid at some time in the future

Question 3

A series of cash flows of equal amount,equally spaced in time is called:

A)a perpetuity
B)a present value factor
C)an annuity
D)a consol
E)an effective annual rate

Answer 3

an annuity

Question 4

Budvar-brewery company expects to receive the following cash inflows: $35 000 three years from now,$50 000 five years from now and $80 000 eight years from now.If the interest rate over the whole period is 8% per annum,compounded quarterly,the total present value of these cash flows (to the nearest dollar)is:

A)$86 433
B)$103 696
C)$152 777
D)$99 998
E)$105 035

Question 5

You have approached Which Bank for a loan to buy a house.The bank offers you a $400 000 loan,repayable in equal monthly instalments at the end of each month for the next 20 years.If the interest rate on the loan is 9% per annum,compounded monthly,your monthly repayment (to the nearest dollar)will be:

A)$1831
B)$3599
C)$2821
D)$4667
E)$3652

Question 6

An annuity where the cash flows continue forever is called a(n):

A)ordinary annuity
B)annuity due
C)absolute annuity
D)perpetuity
E)perpetuity due

Question 7

An annuity for which the cash flows occur at the beginning of each time period is called a(n):

A)ordinary annuity
B)beginning annuity
C)annuity due
D)perpetuity
E)perpetuity due

Question 8

An investor wishes to accumulate $950 000 at the end of four-and-a-half years.How much does he need to deposit now,if the interest rate is 12% per annum,compounded monthly (to the nearest dollar)?

A)$555 098
B)$496 251
C)$570 843
D)$611 115
E)$437 000

Question 9

Which one of the following is the correct formula for computing the future value of an annuity?

A)C $\times$ (Future value factor - 1)/ r
B)C $\times$ (Future value factor + 1)/ r
C)C / (Future value factor - 1)+ r
D)C $\times$ (Future value factor + 1) $\times$ r
E)C - (Future value factor - 1)/ r

Question 10

A credit card has an APR of 18 per cent and charges interest monthly.The effective annual rate on this account will:

A)be less than 18 per cent
B)be less than or equal to 18 per cent
C)equal 18 per cent
D)be greater than or equal to 18 per cent
E)be greater than 18 per cent

Question 11

An increase in the amount of an annuity payment will:

A)have no effect on the present value of the annuity
B)decrease the present value of the annuity
C)increase the value of the annuity present value interest factor
D)increase the future value of the annuity
E)decrease the value of the annuity future value interest factor

Question 12

The effective annual rate is defined as the interest rate that is:

A)compounded at regular intervals throughout the year
B)equal to a monthly rate multiplied by twelve
C)computed by multiplying the rate per period by the number of periods per year
D)expressed as if it were compounded once per year
E)compounded only once over a multi-year period

Question 13

Today,you borrowed $1000 from your bank for five years at 8 per cent interest.The loan requires that you make a payment of $80 one year from today.Based on this information,it appears that you have a(n):

A)amortised loan
B)blended discounted loan
C)interest-only loan
D)pure discount loan
E)complex loan

Question 14

Which one of the following is an annuity but NOT a perpetuity?

A)$300 every two to three weeks for one year
B)a monthly payment of $425 forever
C)payments on the first day of each month in varying amounts for ten months
D)$600 on the last day of each month for two years
E)$400 on the first day of the second,fifth,seventh,and tenth months of each year

Question 15

The Rip Off Insurance Company will pay you $1500 a year for twenty years in exchange for $19 000 today.What interest rate are they paying on this annuity?

A)2.99 per cent
B)3.30 per cent
C)3.67 per cent
D)4.23 per cent
E)4.81 per cent

Question 16

Peter borrowed $10 000 from his bank and agreed to pay $1000 on the principal plus interest each year.This is an example of a(n):

A)interest-only loan
B)amortised loan
C)perpetuity loan
D)pure discount loan
E)lump sum loan

Question 17

Which one of the following is the correct formula for the present value of an ordinary annuity?

A)C $\times$ {{1-[1 / (1+r)^t]} / r}
B)C $\times$ {1-[1 / (1+r)^t]} $\times$ r
C)C $\times$ {1-[1 / (1+r)^t]}
D)C $\times$ {{1-[1 / (1+r)^t]} $\times$ r}
E)C $\times$ {1-[r / (1+r)^t]}

Question 18

In Canada and the United Kingdom,a perpetuity is also called a(n):

A)consol
B)infinite bond
C)infinity flow
D)dowry
E)preference stream

Question 19

You have just won a lottery,which offers a choice in how you may receive your prize.If the interest rate is 10% per annum,compounded annually,which of the following prizes has the highest present value?

A)$2 000 000 immediately
B)an ordinary annuity of $300 000 per year for each of the next 10 years (starting one year from now)
C)$3 000 000 at the end of five years
D)$3 500 000 at the end of nine years
E)a perpetuity of $250 000 per year starting one year from now

Question 20

Patrick's Furniture has approved your application for credit.The maximum payment they have approved is $130 a month for 60 months.The APR is 14.9 per cent.How much furniture can you afford to purchase using the credit offered by the store?

A)$5436.67
B)$5476.57
C)$5508.19
D)$5587.03
E)$5667.54

Question 21

At the end of this month,Les will start saving $150 a month for retirement through his company's superannuation plan.His employer will contribute an additional $0.50 for every $1.00 that he saves.If he is employed by this firm for 30 more years and earns an average of 10.5 per cent on his retirement savings,how much will Les have in his superannuation account 30 years from now?

A)$389 406.19
B)$401 005.25
C)$540 311.67
D)$566 190.22
E)$603 289.01

Question 22

Jake owes $3400 on his credit card.He is not charging any additional purchases because he wants to get this debt paid in full.The card has an APR of 13.9 per cent.How much longer will it take him to pay off this balance if he makes monthly payments of $50 rather than $60?

A)28.24 months
B)31.33 months
C)36.74 months
D)39.20 months
E)41.79 months

Question 23

Lee pays 1 per cent per month interest on his credit card account.When his monthly rate is multiplied by 12,the resulting answer is referred to as the:

A)annual percentage rate
B)compounded rate
C)effective annual rate
D)perpetual rate
E)simple rate

Question 24

The manager of Gloria's Boutique has approved Carla's application for credit.The maximum payment that has been approved is $65 a month for 24 months.The APR is 15.7 per cent.What is the maximum initial purchase that Carla can make given this credit approval?

A)$1288.90
B)$1300.00
C)$1331.42
D)$1350.00
E)$1428.46

Question 25

Tom is planning to invest the following amounts at 4 per cent interest.How much money will he have saved at the end of year three?

A)$2200.00
B)$2238.47
C)$2272.80
D)$2309.16
E)$2363.71

Question 26

Karl can afford car payments of $235 a month for 48 months.The bank will lend him money to buy a car at 7.75 per cent interest.How much money can he afford to borrow?

A)$9672.48
B)$9734.95
C)$9899.60
D)$10 022.15
E)$10 422.09

Question 27

You want to purchase a new condominium which costs $329 000.Your plan is to pay 20 per cent down in cash and finance the balance over 25 years at 6.25 per cent.What will be your monthly mortgage payment?

A)$1736.25
B)$1833.33
C)$1908.16
D)$2221.43
E)$2406.11

Question 28

Today you are purchasing a 20-year,6-per-cent annuity at a cost of $120 000.The annuity will pay annual payments starting one year from today.What is the amount of each payment?

A)$9511.08
B)$10 462.15
C)$10 754.40
D)$11 013.20
E)$12 208.19

Question 29

Webster Mining is considering the purchase of a new sorting machine.The quote consists of a quarterly payment of $29 600 for 7 years at 8 per cent interest.What is the purchase price of the equipment?

A)$621 380.92
B)$629 925.66
C)$687 418.22
D)$774 311.28
E)$836 267.35

Question 30

Kristi is considering an investment that will pay $5000 a year for 7 years,starting one year from today.How much should she pay for this investment if she wishes to earn a 12 per cent rate of return?

A)$17 899.08
B)$18 023.88
C)$20 186.75
D)$22 818.78
E)$24 507.19

Question 31

Katie's Coffee Shop spent $84 000 to refurbish its current facility.The firm borrowed 80 per cent of the refurbishment cost at 9.2 per cent interest for 5 years.What is the amount of each monthly payment?

A)$1108.91
B)$1282.16
C)$1333.33
D)$1401.49
E)$1487.06

Question 32

Chandler Tire Co.is trying to decide which one of two projects it should accept.Both projects have the same start-up costs.Project 1 will produce annual cash flows of $52 000 a year for 6 years.Project 2 will produce cash flows of $48 000 a year for 8 years.The company requires a 15 per cent rate of return.Which project should the company select and why?

A)Project 1;because the annual cash flows are greater than those of Project 2
B)Project 1;because the present value of its cash inflows exceeds those of Project 2 by $14 211.62
C)Project 2;because the total cash inflows are $70 000 greater than those of Project 1
D)Project 2;because the present value of the cash inflows exceeds those of Project 1 by $18 598.33
E)It does not matter as both projects have almost identical present values.

Question 33

Kurt wants to have $25 000 in an investment account 4 years from now.The account will pay 0.2 per cent interest per month.If he saves money every month,starting one month from now,how much will he have to save each month to reach his goal?

A)$496.75
B)$497.03
C)$497.75
D)$501.03
E)$502.14

Question 34

What is the future value of $20 a week for 10 years at 6 per cent interest? Assume the first payment occurs at the end of this week.

A)$14 239.14
B)$14 361.08
C)$14 727.15
D)$15 003.14
E)$15 221.80

Question 35

Jodie's Fashions has just signed a $2.2 million contract.The contract calls for a payment of $0.6 million today,$0.8 million one year from today,and $0.8 million two years from today.What is this contract worth today if the firm can earn 7.2 per cent on its money?

A)$2 038 616.67
B)$2 042 414.79
C)$2 108 001.32
D)$2 124 339.07
E)$2 202 840.91

Question 36

How much money does Suzie need to have in her retirement savings account today if she wishes to withdraw $25 000 a year for 30 years? She expects to earn an average rate of return of 6 per cent.

A)$324 642.24
B)$331 288.67
C)$333 333.33
D)$340 025.00
E)$344 120.78

Question 37

Currently,you owe the bank $9800 for a car loan.The loan has an interest rate of 7.75 per cent and monthly payments of $310.Your financial situation recently changed such that you can no longer afford these payments.After talking with your banker and explaining the situation,he has agreed to lower the monthly payments to $225 while keeping the interest rate at 7.75 per cent.How much longer will it take you to repay this loan than you had originally planned?

A)12.29 months
B)14.47 months
C)15.84 months
D)17.19 months
E)19.90 months

Question 38

The Food Store is planning a major expansion for 4 years from today.In preparation for this,the company is setting aside $35 000 each quarter,starting today,for the next 4 years.How much money will the firm have when it is ready to expand if it can earn an average of 6.25 per cent on its savings?

A)$528 409.29
B)$540 288.16
C)$610 411.20
D)$640 516.63
E)$662 009.14

Question 39

Janice plans to save $75 a month,starting today,for 20 years.Kate plans to save $80 a month for 20 years,starting one month from today.Both Janice and Kate expect to earn an average return of 5.5 per cent on their savings.At the end of the 20 years,Kate will have approximately _____ more than Janice.

A)$2028.39
B)$2066.67
C)$2091.50
D)$2178.14
E)$2189.12

Question 40

Webster Industrial Products just signed a sales contract with a new customer.What is this contract worth as of the end of year 4 if the following payments will be received and the firm earns 5 per cent on its savings?

A)$397 425.35
B)$402 311.19
C)$460 000.00
D)$478 887.78
E)$483 073.00

Question 41

You wish to travel overseas for an extended holiday in four years' time and you estimate you will require $35 000 to pay for the trip.If your bank offers to pay you 5% per annum on a savings account,with interest credited quarterly,how much must you deposit each quarter over the next four years to reach this target?

A)$2187.50
B)$7653.40
C)$1987.64
D)$1989.64
E)$2003.50

Question 42

You have been offered a chance to invest in a coffee plantation in North Queensland.The investment promises to pay $5000 at the end of year 3,$5000 at the end of year 4,$5000 at the end of year 6 and $10 000 at the end of year 10.If you believe that similar investments have a return of approximately 15% what is the highest amount you would be prepared to pay for this investment?

A)$25 000
B)$21 250
C)$10 780
D)$28 750
E)$6180

Question 43

If you were offered the chance of an investment in a mango orchard in North Queensland and you were promised a return of $12 000 per year for ever,with the first payment being in one year from now,what is the maximum amount you would be prepared to pay for such an investment if you required a return of 14 per cent?

A)$87 514
B)$58 714
C)$85 714
D)$120 000
E)It cannot be calculated.

Question 44

You have arranged a bank loan with your bank.You will have no monthly payments but have agreed to pay back $100 000 at the end of the year.The bank has stated that the annual interest rate they will charge you is 7.5 per cent.What is the value of the loan?

A)$107 500.00
B)$93 023.26
C)$99 378.88
D)$92 796.23
E)$92 500.00

Question 45

You need to borrow $30 000 to pay for urgent medical treatment.Your bank has offered you a 3-year amortising loan at 9% interest per annum.If the bank requires monthly payments and interest is added monthly what is the amount of your monthly repayment?

A)$833.33
B)$953.99
C)$987.64
D)$1058.33
E)$908.33

Question 46

If you were offered the chance of an investment in a mango orchard in North Queensland and you were promised a return of $12 000 at the end of each year for the next 10 years,what is the maximum amount you would be prepared to pay for such an investment if you required a return of 12 per cent?

A)$107 143
B)$210 584
C)$87 603
D)$120 000
E)$67 803

Question 47

Dragon bank is offering student credit cards at a special low interest rate of 16% per annum.If monthly minimum payments are required and interest is charged on monthly balances what is the effective annual rate (EAR)?

A)13.33%
B)15.96%
C)16.00%
D)17.23%
E)10.13%

Question 48

The Australian Insurance Company offers you a 10-year annuity of $10 000 per year.The price to purchase the annuity is $70 250.The interest rate implicit in this transaction is approximately:

A)7.00%
B)14.25%
C)9.30%
D)42.00%
E)5.00%

Question 49

Bondi Beachwear Pty Ltd has just purchased a new warehouse.To finance the purchase,they arranged for a 25-year mortgage for 80 per cent of the $1 800 000 purchase price.The monthly payment on this loan will be $10 800.What is the APR? What is the EAR?

A)7.67 per cent;7.94 per cent
B)7.67 per cent;8.03 per cent
C)7.72 per cent;7.94 per cent
D)7.72 per cent;8.03 per cent
E)7.75 per cent;8.03 per cent

Question 50

Witch bank is offering a term deposit that offers 12% per annum interest,compounding monthly.Dragon Bank is offering 12.3% per annum,compounding quarterly.Which of the following statements is true?

A)It is better to invest in Dragon bank because the interest rate is higher.
B)It is better to invest in Witch bank because the compounding periods are shorter.
C)It is better to invest in Dragon bank as the EAR is higher than Witch bank.
D)It is better to invest in Witch bank as the EAR is higher than Dragon bank.
E)It makes no difference as the interest earned will be the same over a year.