Exam 4: Discounted Cash Flow Valuation

The Bluebird Company has a $10,000 liability it must pay three years from today. The company is opening a savings account so that the entire amount will be available when this debt needs to be paid. The plan is to make an initial deposit today and then deposit an additional $2,500 a year for the next three years,starting one year from today. The account pays a 3% rate of return. How much does the Bluebird Company need to deposit today?

Annuities where the payments occur at the end of each time period are called _____,whereas _____ refer to annuity streams with payments occurring at the beginning of each time period.

What is the future value of investing $3,000 for 3/4 year at a continuously compounded rate of 12%?

If a student borrows $20,000 to start a business as a 5 year,10% loan,assume annual payments,the decrease in principal in year 1 is

You have a sub-contracting job with a local manufacturing firm. Your agreement calls for annual payments of $50,000 for the next five years. At a discount rate of 12%,what is this job worth to you today?

A 9% preferred stock pays an annual dividend of $4.50. What is one share of this stock worth today?

The Smart Bank wants to appear competitive based on quoted loan rates and thus must offer a 7.9 annual percentage rate. What is the maximum rate the bank can actually earn based on the quoted rate?

You are considering two projects with the following cash flows: Which of the following statements are true concerning these two projects? I. Both projects have the same future value at the end of year 4,given a positive rate of return. II. Both projects have the same future value given a zero rate of return. III. Both projects have the same future value at any point in time,given a positive rate of return. IV. Project A has a higher future value than project B,given a positive rate of return.

The preferred stock of ABC Co. offers an 8.4% rate of return. The stock is currently priced at $50.00 per share. What is the amount of the annual dividend?

What is meant by "amortizing a loan"?

The highest effective annual rate that can be derived from an annual percentage rate of 9% is computed as:

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

A mortgage instrument pays $1.5 million at the end of each of the next two years. An investor has an alternative investment with the same amount of risk that will pay interest at 8% compounded semiannually. Which of the following amounts is closest to what the investor should pay for the mortgage instrument?

A perpetuity differs from an annuity because:

You are the beneficiary of a life insurance policy. The insurance company informs you that you have two options for receiving the insurance proceeds. You can receive a lump sum of $50,000 today or receive payments of $641 a month for ten years. You can earn 6.5% on your money. Which option should you take and why?

You are considering two insurance settlement offers. The first offer includes annual payments of $5,000,$7,500,and $10,000 over the next three years,respectively. The other offer is the payment of one lump sum amount today. You are trying to decide which offer to accept given the fact that your discount rate is 5%. What is the minimum amount that you will accept today if you are to select the lump sum offer?

Which of the following statements concerning the effective annual rate are correct? I. When making financial decisions,you should compare effective annual rates rather than annual percentage rates. II. The more frequently interest is compounded,the higher the effective annual rate. III. A quoted rate of 6% compounded continuously has a higher effective annual rate than if the rate were compounded daily. IV. When borrowing and choosing which loan to accept,you should select the offer with the highest effective annual rate.

What is the future value of $1,000 a year for five years at a 6% rate of interest?

Bradley Snapp has deposited $6,000 in a guaranteed investment account with a promised rate of 6% compounded annually. He plans to leave it there for 4 full years when he will make a down payment on a car after graduation. How much of a down payment will he be able to make?

You have $2,500 that you want to use to open a savings account. You have found five different accounts that are acceptable to you. All you have to do now is determine which account you want to use such that you can earn the highest rate of interest possible. Which account should you use based upon the annual percentage rates quoted by each bank?