Question 1

First City Bank offers an APR of 7.65 percent on its loans. What is the maximum rate the bank can actually earn based on the quoted rate?

Accepted Answer

A)  7.95 percent 
B)  8.14 percent 
C)  8.21 percent 
D)  7.78 percent 
E)  7.87 percent 
A)  7.95 percent 
B)  8.14 percent 
C)  8.21 percent 
D)  7.78 percent 
E)  7.87 percent

Question 2

Marcus is scheduled to receive annual payments of $3,600 for each of the next 12 years. The discount rate is 8 percent. What is the difference in the present value if these payments are paid at the beginning of each year rather than at the end of each year?

Accepted Answer

A)  $2,170.39 
B)  $2,511.07 
C)  $2,021.18 
D)  $2,027.94 
E)  $2,304.96 
A)  $2,170.39 
B)  $2,511.07 
C)  $2,021.18 
D)  $2,027.94 
E)  $2,304.96

Question 3

Island News purchased a piece of property for $1.79 million. The firm paid a down payment of 20 percent in cash and financed the balance. The loan terms require monthly payments for 20 years at an APR of 4.75 percent, compounded monthly. What is the amount of each mortgage payment?

Accepted Answer

A)  $9,253.92 
B)  $10,419.97 
C)  $8,607.11 
D)  $11,567.40 
E)  $12,301.16 
A)  $9,253.92 
B)  $10,419.97 
C)  $8,607.11 
D)  $11,567.40 
E)  $12,301.16

Question 4

Your grandmother will be gifting you $150 at the end of each month for four years while you attend college. At a discount rate of 3.7 percent, what are these payments worth to you on the day you enter college?

Accepted Answer

A)  $6,201.16 
B)  $6,682.99 
C)  $6,539.14 
D)  $6,608.87 
E)  $6,870.23 
A)  $6,201.16 
B)  $6,682.99 
C)  $6,539.14 
D)  $6,608.87 
E)  $6,870.23

Question 5

Your great aunt left you an inheritance in the form of a trust. The trust agreement states that you are to receive $2,500 on the first day of each year, starting immediately and continuing for 20 years. What is the value of this inheritance today if the applicable discount rate is 4.75 percent?

Accepted Answer

A)  $24,890.88 
B)  $31,311.16 
C)  $33,338.44 
D)  $28,909.29 
E)  $29,333.33 
A)  $24,890.88 
B)  $31,311.16 
C)  $33,338.44 
D)  $28,909.29 
E)  $29,333.33

Question 6

The Distribution Point plans to save $2,000 a month for the next 3 years for future emergencies. The interest rate is 4.5 percent compounded monthly. The first monthly deposit will be made today. What would today's deposit amount have to be if the firm opted for one lump sum deposit that would yield the same amount of savings as the monthly deposits after 3 years?

Accepted Answer

A)  $70,459.07 
B)  $67,485.97 
C)  $69,068.18 
D)  $69,333.33 
E)  $67,233.84 
A)  $70,459.07 
B)  $67,485.97 
C)  $69,068.18 
D)  $69,333.33 
E)  $67,233.84

Question 7

Chris has three options for settling an insurance claim. Option A will provide $1,500 a month for 6 years. Option B will pay $1,025 a month for 10 years. Option C offers $85,000 as a lump sum payment today. The applicable discount rate is 6.8 percent, compounded monthly. Which option should Chris select, and why, if he is only concerned with the financial aspects of the offers?

Accepted Answer

A)  Option A: It provides the largest monthly payment. 
B)  Option B: It pays the largest total amount. 
C)  Option C: It is all paid today. 
D)  Option B: It pays the greatest number of payments. 
E)  Option B: It has the largest value today. 
A)  Option A: It provides the largest monthly payment. 
B)  Option B: It pays the largest total amount. 
C)  Option C: It is all paid today. 
D)  Option B: It pays the greatest number of payments. 
E)  Option B: It has the largest value today.

Question 8

You just paid $480,000 for an annuity that will pay you and your heirs $15,000 a year forever. What rate of return are you earning on this policy?

Accepted Answer

A)  3.650 percent 
B)  3.100 percent 
C)  2.875 percent 
D)  3.125 percent 
E)  4.255 percent 
A)  3.650 percent 
B)  3.100 percent 
C)  2.875 percent 
D)  3.125 percent 
E)  4.255 percent

Question 9

You are considering two savings options. Both options offer a rate of return of 7.6 percent. The first option is to save $2,500, $2,500, and $3,000 at the end of each year for the next three years, respectively. The other option is to save one lump sum amount today. You want to have the same balance in your savings account at the end of the three years, regardless of the savings method you select. If you select the lump sum method, how much do you need to save today?

Accepted Answer

A)  $7,414.59 
B)  $6,289.74 
C)  $6,660.00 
D)  $6,890.89 
E)  $6,784.20 
A)  $7,414.59 
B)  $6,289.74 
C)  $6,660.00 
D)  $6,890.89 
E)  $6,784.20

Question 10

You have been investing $300 a month for the last 8 years. Today, your investment account is worth $43,262. What is your average rate of return on your investments?

Accepted Answer

A)  9.69 percent 
B)  7.23 percent 
C)  9.36 percent 
D)  8.41 percent 
E)  7.78 percent 
A)  9.69 percent 
B)  7.23 percent 
C)  9.36 percent 
D)  8.41 percent 
E)  7.78 percent

Question 11

You are paying an EAR of 16.78 percent on your credit card. The interest is compounded monthly. What is the annual percentage rate on this account?

Accepted Answer

A)  15.61 percent 
B)  13.97 percent 
C)  14.98 percent 
D)  15.75 percent 
E)  16.35 percent 
A)  15.61 percent 
B)  13.97 percent 
C)  14.98 percent 
D)  15.75 percent 
E)  16.35 percent

Question 12

Which one of these statements related to growing annuities and perpetuities is correct?

Accepted Answer

A)  You can compute the present value of a growing annuity but not a growing perpetuity. 
B)  In computing the present value of a growing annuity, you discount the cash flows using the growth rate as the discount rate. 
C)  The future value of an annuity will decrease if the growth rate is increased. 
D)  An increase in the rate of growth will decrease the present value of an annuity. 
E)  The present value of a growing perpetuity will decrease if the discount rate is increased. 
A)  You can compute the present value of a growing annuity but not a growing perpetuity. 
B)  In computing the present value of a growing annuity, you discount the cash flows using the growth rate as the discount rate. 
C)  The future value of an annuity will decrease if the growth rate is increased. 
D)  An increase in the rate of growth will decrease the present value of an annuity. 
E)  The present value of a growing perpetuity will decrease if the discount rate is increased.

Question 13

Your car dealer is willing to lease you a new car for $190 a month for 36 months. Payments are due on the first day of each month starting with the day you sign the lease contract. If your cost of money is 6.5 percent, what is the current value of the lease?

Accepted Answer

A)  $10,331.03 
B)  $6,232.80 
C)  $9,197.74 
D)  $7,203.14 
E)  $11,008.31 
A)  $10,331.03 
B)  $6,232.80 
C)  $9,197.74 
D)  $7,203.14 
E)  $11,008.31

Question 14

Which one of the following statements related to loan interest rates is correct?

Accepted Answer

A)  The annual percentage rate considers the compounding of interest. 
B)  When comparing loans you should compare the effective annual rates. 
C)  Lenders are most apt to quote the effective annual rate. 
D)  Regardless of the compounding period, the effective annual rate will always be higher than the annual percentage rate. 
E)  The more frequent the compounding period, the lower the effective annual rate given a fixed annual percentage rate. 
A)  The annual percentage rate considers the compounding of interest. 
B)  When comparing loans you should compare the effective annual rates. 
C)  Lenders are most apt to quote the effective annual rate. 
D)  Regardless of the compounding period, the effective annual rate will always be higher than the annual percentage rate. 
E)  The more frequent the compounding period, the lower the effective annual rate given a fixed annual percentage rate.

Question 15

You need some money today and the only friend you have that has any is a miser. He agrees to loan you the money you need, if you make payments of $30 a month for the next six months. In keeping with his reputation, he requires that the first payment be paid today. He also charges you 2 percent interest per month. How much total interest is he charging?

Accepted Answer

A)  $4.50 
B)  $3.60 
C)  $9.50 
D)  $4.68 
E)  $8.60 
A)  $4.50 
B)  $3.60 
C)  $9.50 
D)  $4.68 
E)  $8.60

Question 16

What is the future value of $1,575 a year for 25 years at 6.3 percent interest, compounded annually?

Accepted Answer

A)  $76,919.04 
B)  $72,545.78 
C)  $90,152.04 
D)  $92,006.08 
E)  $91,315.09 
A)  $76,919.04 
B)  $72,545.78 
C)  $90,152.04 
D)  $92,006.08 
E)  $91,315.09

Question 17

You are comparing two investment options that each pay 6 percent interest, compounded annually. Both options will provide you with $12,000 of income. Option A pays $2,000 the first year followed by two annual payments of $5,000 each. Option B pays three annual payments of $4,000 each. Which one of the following statements is correct given these two investment options? Assume a positive discount rate. (No calculations needed.)

Accepted Answer

A)  Both options are of equal value since they both provide $12,000 of income. 
B)  Option A has the higher future value at the end of Year 3. 
C)  Option B has a higher present value at Time 0. 
D)  Option B is a perpetuity. 
E)  Option A is an annuity. 
A)  Both options are of equal value since they both provide $12,000 of income. 
B)  Option A has the higher future value at the end of Year 3. 
C)  Option B has a higher present value at Time 0. 
D)  Option B is a perpetuity. 
E)  Option A is an annuity.

Question 18

An ordinary annuity is best defined as:

Accepted Answer

A)  increasing payments paid for a definitive period of time. 
B)  increasing payments paid forever. 
C)  equal payments paid at the end of regular intervals over a stated time period. 
D)  equal payments paid at the beginning of regular intervals for a limited time period. 
E)  equal payments that occur at set intervals for an unlimited period of time. 
A)  increasing payments paid for a definitive period of time. 
B)  increasing payments paid forever. 
C)  equal payments paid at the end of regular intervals over a stated time period. 
D)  equal payments paid at the beginning of regular intervals for a limited time period. 
E)  equal payments that occur at set intervals for an unlimited period of time.

Question 19

You just obtained a loan of $16,700 with monthly payments for four years at 6.35 percent interest, compounded monthly. What is the amount of each payment?

Accepted Answer

A)  $387.71 
B)  $391.40 
C)  $401.12 
D)  $419.76 
E)  $394.89 
A)  $387.71 
B)  $391.40 
C)  $401.12 
D)  $419.76 
E)  $394.89

Question 20

A one-time gift to your college will provide $25,000 in scholarship funds next year with that amount increasing by 2 percent annually thereafter. If the discount rate is 5.5 percent, what is the current value of this perpetual gift?

Accepted Answer

A)  $777,777.78 
B)  $748,602.49 
C)  $726,849.29 
D)  $714,285.71 
E)  $725,000.00 
A)  $777,777.78 
B)  $748,602.49 
C)  $726,849.29 
D)  $714,285.71 
E)  $725,000.00

Exam 6: Discounted Cash Flow Valuation

First City Bank offers an APR of 7.65 percent on its loans. What is the maximum rate the bank can actually earn based on the quoted rate?

Marcus is scheduled to receive annual payments of $3,600 for each of the next 12 years. The discount rate is 8 percent. What is the difference in the present value if these payments are paid at the beginning of each year rather than at the end of each year?

Island News purchased a piece of property for $1.79 million. The firm paid a down payment of 20 percent in cash and financed the balance. The loan terms require monthly payments for 20 years at an APR of 4.75 percent, compounded monthly. What is the amount of each mortgage payment?

Your grandmother will be gifting you $150 at the end of each month for four years while you attend college. At a discount rate of 3.7 percent, what are these payments worth to you on the day you enter college?

Your great aunt left you an inheritance in the form of a trust. The trust agreement states that you are to receive $2,500 on the first day of each year, starting immediately and continuing for 20 years. What is the value of this inheritance today if the applicable discount rate is 4.75 percent?

You just paid $480,000 for an annuity that will pay you and your heirs $15,000 a year forever. What rate of return are you earning on this policy?

You have been investing $300 a month for the last 8 years. Today, your investment account is worth $43,262. What is your average rate of return on your investments?

You are paying an EAR of 16.78 percent on your credit card. The interest is compounded monthly. What is the annual percentage rate on this account?

Which one of these statements related to growing annuities and perpetuities is correct?

Your car dealer is willing to lease you a new car for $190 a month for 36 months. Payments are due on the first day of each month starting with the day you sign the lease contract. If your cost of money is 6.5 percent, what is the current value of the lease?

Which one of the following statements related to loan interest rates is correct?

What is the future value of $1,575 a year for 25 years at 6.3 percent interest, compounded annually?

An ordinary annuity is best defined as:

You just obtained a loan of $16,700 with monthly payments for four years at 6.35 percent interest, compounded monthly. What is the amount of each payment?

A one-time gift to your college will provide $25,000 in scholarship funds next year with that amount increasing by 2 percent annually thereafter. If the discount rate is 5.5 percent, what is the current value of this perpetual gift?

Introduction to Corporate Finance

Financial Statements, Taxes, and Cash Flow

Working with Financial Statements

Long-Term Financial Planning and Growth

Introduction to Valuation: The Time Value of Money

Interest Rates and Bond Valuation

Stock Valuation

Net Present Value and Other Investment Criteria

Making Capital Investment Decisions

Project Analysis and Evaluation

Some Lessons from Capital Market History

Return, Risk, and the Security Market Line

Cost of Capital

Raising Capital

Financial Leverage and Capital Structure Policy

Dividends and Payout Policy

Short Term Finance and Planning

Cash and Liquidity Management

Credit and Inventory Management

International Corporate Finance

Behavioral Finance: Implications for Financial Management

Enterprise Risk Management

Options and Corporate Finance

Option Valuation

Mergers and Acquisitions

Leasing

Filters