Question 1

With an interest-only loan the principal is:

Accepted Answer

A)  forgiven over the loan period; thus it does not have to be repaid. 
B)  repaid in decreasing increments and included in each loan payment. 
C)  repaid in one lump sum at the end of the loan period. 
D)  repaid in equal annual payments. 
E)  repaid in increasing increments through regular monthly payments. 
A)  forgiven over the loan period; thus it does not have to be repaid. 
B)  repaid in decreasing increments and included in each loan payment. 
C)  repaid in one lump sum at the end of the loan period. 
D)  repaid in equal annual payments. 
E)  repaid in increasing increments through regular monthly payments.

Question 2

Nadine is retiring today and has $96,000 in her retirement savings. She expects to earn 5.5 percent, compounded monthly. How much can she withdraw from her retirement savings each month if she plans to spend her last penny 18 years from now?

Accepted Answer

A)  $809.92 
B)  $847.78 
C)  $919.46 
D)  $616.08 
E)  $701.10 
A)  $809.92 
B)  $847.78 
C)  $919.46 
D)  $616.08 
E)  $701.10

Question 3

You are the recipient of a gift that will pay you $25,000 one year from now and every year thereafter for the following 24 years. The payments will increase in value by 2.5 percent each year. If the appropriate discount rate is 8.5 percent, what is the present value of this gift?

Accepted Answer

A)  $416,667 
B)  $316,172 
C)  $409,613 
D)  $311,406 
E)  $386,101 
A)  $416,667 
B)  $316,172 
C)  $409,613 
D)  $311,406 
E)  $386,101

Question 4

A Canadian consol is best categorized as a(n):

Accepted Answer

A)  ordinary annuity. 
B)  amortized cash flow. 
C)  annuity due. 
D)  discounted loan. 
E)  perpetuity. 
A)  ordinary annuity. 
B)  amortized cash flow. 
C)  annuity due. 
D)  discounted loan. 
E)  perpetuity.

Question 5

Which one of the following statements concerning interest rates is correct?

Accepted Answer

A)  Savers would prefer annual compounding over monthly compounding given the same annual percentage rate. 
B)  The effective annual rate decreases as the number of compounding periods per year increases. 
C)  The effective annual rate equals the annual percentage rate when interest is compounded annually. 
D)  Borrowers would prefer monthly compounding over annual compounding given the same annual percentage rate. 
E)  For any positive rate of interest, the annual percentage rate will always exceed the effective annual rate. 
A)  Savers would prefer annual compounding over monthly compounding given the same annual percentage rate. 
B)  The effective annual rate decreases as the number of compounding periods per year increases. 
C)  The effective annual rate equals the annual percentage rate when interest is compounded annually. 
D)  Borrowers would prefer monthly compounding over annual compounding given the same annual percentage rate. 
E)  For any positive rate of interest, the annual percentage rate will always exceed the effective annual rate.

Question 6

What is the EAR if a bank charges you an APR of 7.65 percent, compounded quarterly?

Accepted Answer

A)  7.91 percent 
B)  8.38 percent 
C)  8.02 percent 
D)  7.87 percent 
E)  8.11 percent 
A)  7.91 percent 
B)  8.38 percent 
C)  8.02 percent 
D)  7.87 percent 
E)  8.11 percent

Question 7

Today, you turn 21. Your birthday wish is that you will be a millionaire by your 40th birthday. In an attempt to reach this goal, you decide to save $75 a day, every day, until you turn 40. You open an investment account and deposit your first $75 today. What rate of return must you earn to achieve your goal? Note: Ignore Leap Years.

Accepted Answer

A)  7.67 percent 
B)  6.27 percent 
C)  9.20 percent 
D)  7.06 percent 
E)  8.54 percent 
A)  7.67 percent 
B)  6.27 percent 
C)  9.20 percent 
D)  7.06 percent 
E)  8.54 percent

Question 8

You borrowed $185,000 for 30 years to buy a house. The interest rate is 4.35 percent, compounded monthly. If you pay all of your monthly payments as agreed, how much total interest will you pay on this mortgage? (Round the monthly payment to the nearest whole cent.)

Accepted Answer

A)  $150,408 
B)  $147,027 
C)  $146,542 
D)  $154,319 
E)  $141,406 
A)  $150,408 
B)  $147,027 
C)  $146,542 
D)  $154,319 
E)  $141,406

Question 9

Trish receives $450 on the first of each month. Josh receives $450 on the last day of each month. Both Trish and Josh will receive payments for next four years. At a discount rate of 9.5 percent, what is the difference in the present value of these two sets of payments?

Accepted Answer

A)  $141.80 
B)  $151.06 
C)  $154.30 
D)  $159.08 
E)  $162.50 
A)  $141.80 
B)  $151.06 
C)  $154.30 
D)  $159.08 
E)  $162.50

Question 10

You estimate that you will owe $40,200 in student loans by the time you graduate. If you want to have this debt paid in full within 10 years, how much must you pay each month if the interest rate is 4.35 percent, compounded monthly?

Accepted Answer

A)  $411.09 
B)  $413.73 
C)  $414.28 
D)  $436.05 
E)  $442.50 
A)  $411.09 
B)  $413.73 
C)  $414.28 
D)  $436.05 
E)  $442.50

Question 11

What is the future value of $8,500 a year for 40 years at 10.8 percent interest, compounded annually?

Accepted Answer

A)  $3,278,406.16 
B)  $4,681,062.12 
C)  $2,711,414.14 
D)  $3,989,476.67 
E)  $4,021,223.33 
A)  $3,278,406.16 
B)  $4,681,062.12 
C)  $2,711,414.14 
D)  $3,989,476.67 
E)  $4,021,223.33

Question 12

You are preparing to make monthly payments of $100, beginning at the end of this month, into an account that pays 5 percent interest, compounded monthly. How many payments will you have made when your account balance reaches $10,000?

Accepted Answer

A)  97.30 
B)  83.77 
C)  89.46 
D)  100.00 
E)  91.12 
A)  97.30 
B)  83.77 
C)  89.46 
D)  100.00 
E)  91.12

Question 13

Racing Motors wants to save $825,000 to buy some new equipment three years from now. The plan is to set aside an equal amount of money on the first day of each quarter starting today. How much does the company need to save each quarter to achieve its goal if it can earn 4.45 percent on its savings?

Accepted Answer

A)  $63,932.91 
B)  $62,969.70 
C)  $63,192.05 
D)  $62,925.00 
E)  $64,644.17 
A)  $63,932.91 
B)  $62,969.70 
C)  $63,192.05 
D)  $62,925.00 
E)  $64,644.17

Question 14

Project A has cash flows of $4,000, $3,000, $0, and $3,000 for Years 1 to 4, respectively. Project B has cash flows of $2,000, $3,000, $2,000, and $3,000 for Years 1 to 4, respectively. Which one of the following statements is correct assuming the discount rate is positive? (No calculations needed)

Accepted Answer

A)  The cash flows for Project B are an annuity, but those of Project A are not. 
B)  Both sets of cash flows have equal present values as of Time 0. 
C)  The present value at Time 0 of the final cash flow for Project A will be discounted using an exponent of three. 
D)  Both projects have equal values at any point in time since they both pay the same total amount. 
E)  Project B is worth less today than Project A. 
A)  The cash flows for Project B are an annuity, but those of Project A are not. 
B)  Both sets of cash flows have equal present values as of Time 0. 
C)  The present value at Time 0 of the final cash flow for Project A will be discounted using an exponent of three. 
D)  Both projects have equal values at any point in time since they both pay the same total amount. 
E)  Project B is worth less today than Project A.

Question 15

Your broker is offering 1.2 percent compounded daily on its money market account. If you deposit $7,500 today, how much will you have in your account 15 years from now?

Accepted Answer

A)  $8,979.10 
B)  $9,714.06 
C)  $8,204.50 
D)  $9,336.81 
E)  $9,414.14 
A)  $8,979.10 
B)  $9,714.06 
C)  $8,204.50 
D)  $9,336.81 
E)  $9,414.14

Question 16

What is the present value of $1,400 a year at a discount rate of 8 percent if the first payment is received 7 years from now and you receive a total of 25 annual payments?

Accepted Answer

A)  $9,417.69 
B)  $9,238.87 
C)  $9,333.33 
D)  $9,420.12 
E)  $9,881.72 
A)  $9,417.69 
B)  $9,238.87 
C)  $9,333.33 
D)  $9,420.12 
E)  $9,881.72

Question 17

Your anticipated wedding is three years from today. You don't know who your spouse will be but you do know that you are saving $10,000 today and $17,000 one year from today for this purpose. You also plan to pay the final $12,000 of anticipated costs on your wedding day. At a discount rate of 5.5 percent, what is the current cost of your upcoming wedding?

Accepted Answer

A)  $36,333.11 
B)  $41,065.25 
C)  $36,895.17 
D)  $38,411.08 
E)  $35,248.16 
A)  $36,333.11 
B)  $41,065.25 
C)  $36,895.17 
D)  $38,411.08 
E)  $35,248.16

Question 18

Stephanie is going to contribute $160 on the first of each month, starting today, to her retirement account. Her employer will provide a match of 50 percent. In other words, her employer will add $80 to the amount Stephanie saves. If both Stephanie and her employer continue to do this and she can earn a monthly interest rate of .45 percent, how much will she have in her retirement account 35 years from now?

Accepted Answer

A)  $336,264.14 
B)  $204,286.67 
C)  $199,312.04 
D)  $268,418.78 
E)  $299,547.97 
A)  $336,264.14 
B)  $204,286.67 
C)  $199,312.04 
D)  $268,418.78 
E)  $299,547.97

Question 19

The actual interest rate on a loan that is compounded monthly but expressed as an annual rate is referred to as the ________ rate.

Accepted Answer

A)  stated 
B)  discounted annual 
C)  effective annual 
D)  periodic monthly 
E)  consolidated monthly 
A)  stated 
B)  discounted annual 
C)  effective annual 
D)  periodic monthly 
E)  consolidated monthly

Question 20

Waldo expects to save the following amounts: Year 1 = $50,000; Year 2 = $28,000; Year 3 = $12,000. If he can earn an average annual return of 10.5 percent, how much will he have saved in this account exactly 25 years from the time of the first deposit?

Accepted Answer

A)  $1,172,373 
B)  $935,334 
C)  $806,311 
D)  $947,509 
E)  $1,033,545 
A)  $1,172,373 
B)  $935,334 
C)  $806,311 
D)  $947,509 
E)  $1,033,545

Exam 6: Discounted Cash Flow Valuation

With an interest-only loan the principal is:

Nadine is retiring today and has $96,000 in her retirement savings. She expects to earn 5.5 percent, compounded monthly. How much can she withdraw from her retirement savings each month if she plans to spend her last penny 18 years from now?

You are the recipient of a gift that will pay you $25,000 one year from now and every year thereafter for the following 24 years. The payments will increase in value by 2.5 percent each year. If the appropriate discount rate is 8.5 percent, what is the present value of this gift?

A Canadian consol is best categorized as a(n):

Which one of the following statements concerning interest rates is correct?

What is the EAR if a bank charges you an APR of 7.65 percent, compounded quarterly?

You borrowed $185,000 for 30 years to buy a house. The interest rate is 4.35 percent, compounded monthly. If you pay all of your monthly payments as agreed, how much total interest will you pay on this mortgage? (Round the monthly payment to the nearest whole cent.)

Trish receives $450 on the first of each month. Josh receives $450 on the last day of each month. Both Trish and Josh will receive payments for next four years. At a discount rate of 9.5 percent, what is the difference in the present value of these two sets of payments?

You estimate that you will owe $40,200 in student loans by the time you graduate. If you want to have this debt paid in full within 10 years, how much must you pay each month if the interest rate is 4.35 percent, compounded monthly?

What is the future value of $8,500 a year for 40 years at 10.8 percent interest, compounded annually?

You are preparing to make monthly payments of $100, beginning at the end of this month, into an account that pays 5 percent interest, compounded monthly. How many payments will you have made when your account balance reaches $10,000?

Racing Motors wants to save $825,000 to buy some new equipment three years from now. The plan is to set aside an equal amount of money on the first day of each quarter starting today. How much does the company need to save each quarter to achieve its goal if it can earn 4.45 percent on its savings?

Project A has cash flows of $4,000, $3,000, $0, and $3,000 for Years 1 to 4, respectively. Project B has cash flows of $2,000, $3,000, $2,000, and $3,000 for Years 1 to 4, respectively. Which one of the following statements is correct assuming the discount rate is positive? (No calculations needed)

Your broker is offering 1.2 percent compounded daily on its money market account. If you deposit $7,500 today, how much will you have in your account 15 years from now?

What is the present value of $1,400 a year at a discount rate of 8 percent if the first payment is received 7 years from now and you receive a total of 25 annual payments?

The actual interest rate on a loan that is compounded monthly but expressed as an annual rate is referred to as the ________ rate.

Waldo expects to save the following amounts: Year 1 = $50,000; Year 2 = $28,000; Year 3 = $12,000. If he can earn an average annual return of 10.5 percent, how much will he have saved in this account exactly 25 years from the time of the first deposit?

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