Question 1

You have accumulated $8,000 toward the down payment on a piece of lake front property in rural Minnesota.You wish to accumulate $12,000 for the down payment in four years.If you choose not to contribute more new funds to your down payment fund,what rate of return must your fund earn to reach your objective in the specified time? Assume that your investment fund compounds annually.

Accepted Answer

A) 10.67% per year 
B) 50.00% per year 
C) 12.50% per year 
D) There is not enough information to answer this question.

Question 2

Common stockholders are subordinate to all other creditors in their payments.

Accepted Answer

A) True 
 B)False

Question 3

Michael received a professional baseball contract paying $7,000,000 per year for 5 years,Bert received a two-year contract for $16,000,000 per year.For purposes of calculations,treat these contracts as ordinary annuities.Who's contract has a greater present value if we assume a discount rate of 6%?

Accepted Answer

A) Bert = $29,334,283 
B) Michael = $29,486,547 
C) Bert = $39,459651 
D) Michael = $39,743,196

Question 4

You have decided to endow a Chair in Finance at Whatsamatta University.How much money must you deposit into the endowment account today if the Chair pays $125,000 per year (first payment one year from today),increases at a rate of 2% per year forever,and is invested at a rate that pays out 4.50% per year?

Accepted Answer

A) $2,777,777.78 
B) $2,902,777.78 
C) $5,000,000.00 
D) There is not enough information to answer this question.

Question 5

The maturity of an issue of preferred stock is:

Accepted Answer

A) the same as the longest maturity bond issued by the firm. 
B) variable between 15 and 30 years. 
C) indefinite,just as the maturity of common shares. 
D) renewable every five years.

Question 6

Annuity A has a greater present value than annuity B when cash flows are discounted using the same positive interest rate for each annuity.Which annuity will have the larger future value if compounded at the same interest rate?

Accepted Answer

A) Annuity A will have a larger future value. 
B) Annuity B will have a larger future value. 
C) The future values will be the same. 
D) There is not enough information to determine which annuity will have a greater future value.

Question 7

You have been accepted into a prestigious private university in Southern California - congratulations! Since no one from this school has ever graduated in only four years,you anticipate that you will need to make 10 semi-annual tuition payments of $25,000 each with the first cash flow six months from today.If you choose to discount these cash flows at an annual rate of 6%,what is the present value cost of tuition to attend your university of choice?

Accepted Answer

A) $186,814.54 
B) $184,002.18 
C) $250,000.00 
D) $213,255.07

Question 8

Epo Pharmaceuticals Inc.has an issue of preferred stock outstanding that has a required rate of return of 9% and pays $6 annual dividends.If the preferred share were issued 3 years ago,what is the current price per share?

Accepted Answer

A) $51.48 
B) $66.67 
C) $86.34 
D) There is not enough information to answer this question.

Question 9

If the discount rate used to compare the present value of two annuities is 0%,then the timing of the cash flows is unimportant in the present value calculation.

Accepted Answer

A) True 
 B)False

Question 10

Individuals and businesses require compensation for delaying consumption.Which of the following questions may contribute to the magnitude of the compensation?

Accepted Answer

A) Is there a possibility that the price may increase for the delayed good or service? 
B) If current consumption is delayed is it possible that it may not be realized at all? 
C) How badly does the firm or individual wish to consume now and what do they require for delaying? 
D) All of the above are legitimate reasons to require additional compensation for delaying consumption.

Question 11

You are about to purchase a new car from a dealer who has a new and unusual payment plan.You have the choice to pay $28,000 cash today or $31,000 in four years.If you have the opportunity to borrow the cash price value of the car at a rate of 2.5% and repay the loan in a lump sum in 4 years,which option should you take and why?

Accepted Answer

A) Pay the $31,000 in the future because it it always better to delay payment for new assets. 
B) Pay the $31,000 in the future because the PV is less than $28,000 today. 
C) Pay the $28,000 cash today even if you need to borrow the money because the FV of the repayment in 4 years is only $30,906.76. 
D) Pay the $28,000 cash today because you pay a full $3,000 less than if you wait and pay the other option as presented.

Question 12

What is the pecking order of payments (from first to last)for a firm's creditors and owners?

Accepted Answer

A) bondholders,then preferred stockholders,then common stockholders 
B) preferred stockholders,then common stockholders,then bondholders 
C) common stockholders,then bondholders,then preferred stockholders 
D) bondholders,then common stockholders,then preferred stockholders

Question 13

You have decided to endow a Chair in Finance at Whatsamatta University.How much money must you deposit into the endowment account today if the Chair pays $125,000 per year forever (first payment one year from today)and is invested at a rate that pays out 4.50% per year?

Accepted Answer

A) $277,777.78 
B) $2,902,777.78 
C) $2,777,777.78 
D) There is not enough information to answer this question.

Question 14

________ is the cost of a foregone alternative.

Accepted Answer

A) Opportunity cost 
B) Time value of money 
C) Inflation 
D) An annuity

Question 15

Skye Industries Inc.bonds currently have 14 years remaining to maturity.What is the yield to maturity of the firm's semi-annual bonds if they carry a face value of $1,000,an annual coupon rate of 8% and have a current price of $885.16?

Accepted Answer

A) 8.00% 
B) 8.75% 
C) 9.50% 
D) 10.25%

Question 16

Cascade Industries Inc.intends to pay a common stock dividend of $3.18 one year from today and the firm anticipates that the dividend will continue to grow at a rate of 2% per year indefinitely.If the firm has a 13% required rate of return,what is the current price per share of stock?

Accepted Answer

A) $21.20 
B) $28.91 
C) $21.62 
D) $29.49

Question 17

An unattractive feature of U.S.corporate bonds is that there is no secondary market and the investor is forced to hold the bond until maturity.

Accepted Answer

A) True 
 B)False

Question 18

Eastinghome Inc.just paid $8,000 to a landowner to explore for but not extract valuable minerals.If the landowner invests the money at a rate of 5.5% compounded annually for 7 years what is the investment worth at the end of that time period?

Accepted Answer

A) $5,499.49 
B) $11,637.43 
C) $56,000.00 
D) $66,135.15

Question 19

What is the present value of a series of $5,000 end-of-the-year cash flows to be received forever if the required rate of return is 6.00% per year and the first cash flow is one year from today?

Accepted Answer

A) $8,333.33 
B) $83,333.33 
C) $300.00 
D) This question cannot be answered because there is no time period provided.

Question 20

Zero coupon bonds sell at a steep premium to the face value.

Accepted Answer

A) True 
 B)False

Exam 7: Time Value of Money Basics and Applications

Common stockholders are subordinate to all other creditors in their payments.

Michael received a professional baseball contract paying $7,000,000 per year for 5 years,Bert received a two-year contract for $16,000,000 per year.For purposes of calculations,treat these contracts as ordinary annuities.Who's contract has a greater present value if we assume a discount rate of 6%?

The maturity of an issue of preferred stock is:

Annuity A has a greater present value than annuity B when cash flows are discounted using the same positive interest rate for each annuity.Which annuity will have the larger future value if compounded at the same interest rate?

Epo Pharmaceuticals Inc.has an issue of preferred stock outstanding that has a required rate of return of 9% and pays $6 annual dividends.If the preferred share were issued 3 years ago,what is the current price per share?

If the discount rate used to compare the present value of two annuities is 0%,then the timing of the cash flows is unimportant in the present value calculation.

Individuals and businesses require compensation for delaying consumption.Which of the following questions may contribute to the magnitude of the compensation?

What is the pecking order of payments (from first to last) for a firm's creditors and owners?

You have decided to endow a Chair in Finance at Whatsamatta University.How much money must you deposit into the endowment account today if the Chair pays $125,000 per year forever (first payment one year from today) and is invested at a rate that pays out 4.50% per year?

________ is the cost of a foregone alternative.

Skye Industries Inc.bonds currently have 14 years remaining to maturity.What is the yield to maturity of the firm's semi-annual bonds if they carry a face value of $1,000,an annual coupon rate of 8% and have a current price of $885.16?

Cascade Industries Inc.intends to pay a common stock dividend of $3.18 one year from today and the firm anticipates that the dividend will continue to grow at a rate of 2% per year indefinitely.If the firm has a 13% required rate of return,what is the current price per share of stock?

An unattractive feature of U.S.corporate bonds is that there is no secondary market and the investor is forced to hold the bond until maturity.

Eastinghome Inc.just paid $8,000 to a landowner to explore for but not extract valuable minerals.If the landowner invests the money at a rate of 5.5% compounded annually for 7 years what is the investment worth at the end of that time period?

What is the present value of a series of $5,000 end-of-the-year cash flows to be received forever if the required rate of return is 6.00% per year and the first cash flow is one year from today?

Zero coupon bonds sell at a steep premium to the face value.