Question 1

Given a firm with positive annual cash flows,which one of the following will increase the current value of that firm?

Accepted Answer

A) Increasing the annual growth rate of the cash flows 
B) Increasing the discount rate 
C) Decreasing the amount of each cash flow 
D) Decreasing the life of the firm 
E) Increasing either the growth rate of the cash flows or the discount rate 
A) Increasing the annual growth rate of the cash flows 
B) Increasing the discount rate 
C) Decreasing the amount of each cash flow 
D) Decreasing the life of the firm 
E) Increasing either the growth rate of the cash flows or the discount rate

Question 2

The Life Trust Co.purchased an investment that will pay $5,000 next year.Every year thereafter,the payment will increase by 1.25 percent.What is the value of this investment if the required rate of return is 8.3 percent?

Accepted Answer

A) $62,300.00 
B) $60,993.98 
C) $65,647.81 
D) $70,921.99 
E) $73,984.23 
A) $62,300.00 
B) $60,993.98 
C) $65,647.81 
D) $70,921.99 
E) $73,984.23

Question 3

Later on today,you will receive an annual dividend of $2.50 a share on ABC stock.The dividend is expected to increase by 2 percent annually thereafter.Which formula should be used to compute the value of the stock today if the discount rate is 14 percent?

Accepted Answer

A) $2.50 + $2.50 / 0.14 
B) ($2.50 × 1.02)/ (0.14 - 0.02) 
C) ($2.50 × 1.02)/ 0.14 
D) $2.50 + ($2.50 × 1.02)/ (0.14 - 0.02) 
E) $2.50 + ($2.50 × 1.02)/ 0.14 
A) $2.50 + $2.50 / 0.14 
B) ($2.50 × 1.02)/ (0.14 - 0.02) 
C) ($2.50 × 1.02)/ 0.14 
D) $2.50 + ($2.50 × 1.02)/ (0.14 - 0.02) 
E) $2.50 + ($2.50 × 1.02)/ 0.14

Question 4

Assume two annuities will each provide $500 annual cash flows for 5 years.One is an ordinary annuity and the other is an annuity due.Which statement concerning these annuities is correct?

Accepted Answer

A) The ordinary annuity will pay on the first day of each time period. 
B) The annuity due is more valuable than the ordinary annuity. 
C) The annuity due will pay one more payment than the ordinary annuity. 
D) The ordinary annuity will have the highest value at the end of Year 4. 
E) Both annuities are of equal value given any positive discount rate. 
A) The ordinary annuity will pay on the first day of each time period. 
B) The annuity due is more valuable than the ordinary annuity. 
C) The annuity due will pay one more payment than the ordinary annuity. 
D) The ordinary annuity will have the highest value at the end of Year 4. 
E) Both annuities are of equal value given any positive discount rate.

Question 5

Alex estimates that he will have $47,500 in student loans by the time he graduates.The interest rate is 7.2 percent,compounded monthly.If he wants to have this debt paid in full within 5 years following graduation,how much must he pay each month?

Accepted Answer

A) $745.69 
B) $873.65 
C) $945.05 
D) $741.67 
E) $980.40 
A) $745.69 
B) $873.65 
C) $945.05 
D) $741.67 
E) $980.40

Question 6

An annuity stream where the payments occur forever is called a(n)

Accepted Answer

A) annuity due. 
B) indemnity. 
C) perpetuity. 
D) amortized cash flow stream. 
E) ordinary annuity. 
A) annuity due. 
B) indemnity. 
C) perpetuity. 
D) amortized cash flow stream. 
E) ordinary annuity.

Question 7

What is the effective annual rate if the APR is 5.25 percent,compounded semiannually?

Accepted Answer

A) 5.278% 
B) 5.299% 
C) 5.306% 
D) 5.313% 
E) 5.319% 
A) 5.278% 
B) 5.299% 
C) 5.306% 
D) 5.313% 
E) 5.319%

Question 8

The net present value of an investment is best defined as the

Accepted Answer

A) current cost if the investment is made today. 
B) net value received at the end of the investment period. 
C) present value of the investment's future cash flows minus the investment's cost. 
D) net decrease in value caused by waiting to receive the cash benefit from the investment. 
E) value received at the end of the investment period minus the investment's cost. 
A) current cost if the investment is made today. 
B) net value received at the end of the investment period. 
C) present value of the investment's future cash flows minus the investment's cost. 
D) net decrease in value caused by waiting to receive the cash benefit from the investment. 
E) value received at the end of the investment period minus the investment's cost.

Question 9

Rita plans to save $1,500,$1,500,and $2,500 a year over the next 3 years,respectively.How much would you need to deposit in one lump sum today to have the same amount as Rita 3 years from now if you both earn 3.5 percent,compounded annually?

Accepted Answer

A) $4,857.92 
B) $5,104.40 
C) $5,491.42 
D) $6,097.95 
E) $4,434.87 
A) $4,857.92 
B) $5,104.40 
C) $5,491.42 
D) $6,097.95 
E) $4,434.87

Question 10

Which term applies to a set of cash flows that are finite in number and increase in amount at a steady rate?

Accepted Answer

A) Perpetuity 
B) Growing annuity 
C) Growing perpetuity 
D) Annuity 
E) Lump sum payment 
A) Perpetuity 
B) Growing annuity 
C) Growing perpetuity 
D) Annuity 
E) Lump sum payment

Question 11

Suzie just won the lottery! As her prize,she will receive $2,500 a month for 10 years.The first payment will be paid today.At 6 percent,compounded monthly,what is this prize worth to her today?

Accepted Answer

A) $224,647.53 
B) $223,940.48 
C) $224,953.46 
D) $225,183.63 
E) $226,309.55 
A) $224,647.53 
B) $223,940.48 
C) $224,953.46 
D) $225,183.63 
E) $226,309.55

Question 12

Keane just borrowed $38,700 for 5 years at an interest rate of 5.9 percent,compounded monthly.What is the amount of each monthly loan payment?

Accepted Answer

A) $627.62 
B) $721.60 
C) $630.62 
D) $746.38 
E) $693.04 
A) $627.62 
B) $721.60 
C) $630.62 
D) $746.38 
E) $693.04

Question 13

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

Accepted Answer

A) 0.09e - 1 
B) e0.09 × (1 / 0.09) 
C) e0.09 - 1 
D) e × (1 + 0.09) 
E) (1 + 0.09)e 
A) 0.09e - 1 
B) e0.09 × (1 / 0.09) 
C) e0.09 - 1 
D) e × (1 + 0.09) 
E) (1 + 0.09)e

Question 14

Wings and More purchased a piece of property for $1.8 million.It paid a down payment of 20 percent in cash and financed the balance.The loan terms require monthly payments for 15 years at an annual percentage rate of 4.60 percent,compounded monthly.What is the amount of each mortgage payment?

Accepted Answer

A) $12,440.01 
B) $11,029.33 
C) $10,236.25 
D) $10,799.18 
E) $11,089.64 
A) $12,440.01 
B) $11,029.33 
C) $10,236.25 
D) $10,799.18 
E) $11,089.64

Question 15

An investment will pay $3,000 every 3 years with the first payment occurring 3 years from today.The investment has a 12-year life.To compute the present value of this investment you need to calculate the

Accepted Answer

A) present value of a $3,000,12-year annuity,and divide the result by 4. 
B) present value of a $1,000 annuity with 12 time periods. 
C) rate of growth for each 3-year period. 
D) present value of a $3,000 annual annuity with four payments and discount that value for 3 years. 
E) interest rate for the 3-year period. 
A) present value of a $3,000,12-year annuity,and divide the result by 4. 
B) present value of a $1,000 annuity with 12 time periods. 
C) rate of growth for each 3-year period. 
D) present value of a $3,000 annual annuity with four payments and discount that value for 3 years. 
E) interest rate for the 3-year period.

Question 16

Jensen's Shipping wants to expand as soon as it can save $112 million.Towards that goal,the firm started saving 3 years ago and currently has $38.2 million saved.Starting today,the firm will add $15,000 a month to this savings account.The rate of return is 7.1 percent,compounded monthly.How long will it be from now before the company can expand?

Accepted Answer

A) 14.60 years 
B) 16.52 years 
C) 15.67 years 
D) 16.08 years 
E) 15.39 years 
A) 14.60 years 
B) 16.52 years 
C) 15.67 years 
D) 16.08 years 
E) 15.39 years

Question 17

Beatrice is investing $5,000 in an account that pays 4 percent simple interest.How much more could she have earned over a period of 10 years if the interest had compounded annually?

Accepted Answer

A) $414.79 
B) $0 
C) $385.65 
D) $401.22 
E) $390.70 
A) $414.79 
B) $0 
C) $385.65 
D) $401.22 
E) $390.70

Question 18

You retire at age 66 and expect to live another 25 years.On the day you retire,you have $128,500 saved.You expect to earn 4.5 percent,compounded monthly.How much can you withdraw from your savings each month if you plan to die on the day you spend your last penny?

Accepted Answer

A) $801.96 
B) $684.05 
C) $798.17 
D) $672.95 
E) $714.24 
A) $801.96 
B) $684.05 
C) $798.17 
D) $672.95 
E) $714.24

Question 19

This morning,you invested your tax refund of $638 at an interest rate of 3.1 percent,compounded annually.How much will this investment be worth 7 years from now?

Accepted Answer

A) $818.40 
B) $775.57 
C) $894.15 
D) $790.01 
E) $921.60 
A) $818.40 
B) $775.57 
C) $894.15 
D) $790.01 
E) $921.60

Question 20

The value of a firm is best defined as the

Accepted Answer

A) sum of all of the firm's future cash flows. 
B) current year's cash flow times (1 + g). 
C) current year's cash flow divided by r. 
D) total present value of all of the firm's future cash flows. 
E) current year's cash flows divided by (g - r). 
A) sum of all of the firm's future cash flows. 
B) current year's cash flow times (1 + g). 
C) current year's cash flow divided by r. 
D) total present value of all of the firm's future cash flows. 
E) current year's cash flows divided by (g - r).

Given a firm with positive annual cash flows,which one of the following will increase the current value of that firm?

The Life Trust Co.purchased an investment that will pay $5,000 next year.Every year thereafter,the payment will increase by 1.25 percent.What is the value of this investment if the required rate of return is 8.3 percent?

Later on today,you will receive an annual dividend of $2.50 a share on ABC stock.The dividend is expected to increase by 2 percent annually thereafter.Which formula should be used to compute the value of the stock today if the discount rate is 14 percent?

Assume two annuities will each provide $500 annual cash flows for 5 years.One is an ordinary annuity and the other is an annuity due.Which statement concerning these annuities is correct?

Alex estimates that he will have $47,500 in student loans by the time he graduates.The interest rate is 7.2 percent,compounded monthly.If he wants to have this debt paid in full within 5 years following graduation,how much must he pay each month?

An annuity stream where the payments occur forever is called a(n)

What is the effective annual rate if the APR is 5.25 percent,compounded semiannually?

The net present value of an investment is best defined as the

Rita plans to save $1,500,$1,500,and $2,500 a year over the next 3 years,respectively.How much would you need to deposit in one lump sum today to have the same amount as Rita 3 years from now if you both earn 3.5 percent,compounded annually?

Which term applies to a set of cash flows that are finite in number and increase in amount at a steady rate?

Suzie just won the lottery! As her prize,she will receive $2,500 a month for 10 years.The first payment will be paid today.At 6 percent,compounded monthly,what is this prize worth to her today?

Keane just borrowed $38,700 for 5 years at an interest rate of 5.9 percent,compounded monthly.What is the amount of each monthly loan payment?

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

Wings and More purchased a piece of property for $1.8 million.It paid a down payment of 20 percent in cash and financed the balance.The loan terms require monthly payments for 15 years at an annual percentage rate of 4.60 percent,compounded monthly.What is the amount of each mortgage payment?

An investment will pay $3,000 every 3 years with the first payment occurring 3 years from today.The investment has a 12-year life.To compute the present value of this investment you need to calculate the

Beatrice is investing $5,000 in an account that pays 4 percent simple interest.How much more could she have earned over a period of 10 years if the interest had compounded annually?

You retire at age 66 and expect to live another 25 years.On the day you retire,you have $128,500 saved.You expect to earn 4.5 percent,compounded monthly.How much can you withdraw from your savings each month if you plan to die on the day you spend your last penny?

This morning,you invested your tax refund of $638 at an interest rate of 3.1 percent,compounded annually.How much will this investment be worth 7 years from now?

The value of a firm is best defined as the

Introduction to Corporate Finance

Financial Statements and Cash Flow

Financial Statements Analysis and Financial Models

Interest Rates and Bond Valuation

Stock Valuation

Net Present Value and Other Investment Rules

Making Capital Investment Decisions

Risk Analysis, Real Options, and Capital Budgeting

Risk and Return: Lessons From Market History

Return and Risk: The Capital Asset Pricing Model Capm

Risk, Cost of Capital, and Valuation

Efficient Capital Markets and Behavioral Challenges

Capital Structure: Basic Concepts

Capital Structure: Limits to the Use of Debt

Dividends and Other Payouts

Options and Corporate Finance

Short-Term Finance and Planning

Raising Capital

International Corporate Finance

Mergers and Acquisitions Web Only

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Exam 4: Discounted Cash Flow Valuation

Given a firm with positive annual cash flows,which one of the following will increase the current value of that firm?

The Life Trust Co.purchased an investment that will pay $5,000 next year.Every year thereafter,the payment will increase by 1.25 percent.What is the value of this investment if the required rate of return is 8.3 percent?

Later on today,you will receive an annual dividend of $2.50 a share on ABC stock.The dividend is expected to increase by 2 percent annually thereafter.Which formula should be used to compute the value of the stock today if the discount rate is 14 percent?

Assume two annuities will each provide $500 annual cash flows for 5 years.One is an ordinary annuity and the other is an annuity due.Which statement concerning these annuities is correct?

Alex estimates that he will have $47,500 in student loans by the time he graduates.The interest rate is 7.2 percent,compounded monthly.If he wants to have this debt paid in full within 5 years following graduation,how much must he pay each month?

An annuity stream where the payments occur forever is called a(n)

What is the effective annual rate if the APR is 5.25 percent,compounded semiannually?

The net present value of an investment is best defined as the

Rita plans to save $1,500,$1,500,and $2,500 a year over the next 3 years,respectively.How much would you need to deposit in one lump sum today to have the same amount as Rita 3 years from now if you both earn 3.5 percent,compounded annually?

Which term applies to a set of cash flows that are finite in number and increase in amount at a steady rate?

Suzie just won the lottery! As her prize,she will receive $2,500 a month for 10 years.The first payment will be paid today.At 6 percent,compounded monthly,what is this prize worth to her today?

Keane just borrowed $38,700 for 5 years at an interest rate of 5.9 percent,compounded monthly.What is the amount of each monthly loan payment?

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

Wings and More purchased a piece of property for $1.8 million.It paid a down payment of 20 percent in cash and financed the balance.The loan terms require monthly payments for 15 years at an annual percentage rate of 4.60 percent,compounded monthly.What is the amount of each mortgage payment?

An investment will pay $3,000 every 3 years with the first payment occurring 3 years from today.The investment has a 12-year life.To compute the present value of this investment you need to calculate the

Beatrice is investing $5,000 in an account that pays 4 percent simple interest.How much more could she have earned over a period of 10 years if the interest had compounded annually?

You retire at age 66 and expect to live another 25 years.On the day you retire,you have $128,500 saved.You expect to earn 4.5 percent,compounded monthly.How much can you withdraw from your savings each month if you plan to die on the day you spend your last penny?

This morning,you invested your tax refund of $638 at an interest rate of 3.1 percent,compounded annually.How much will this investment be worth 7 years from now?

The value of a firm is best defined as the

Introduction to Corporate Finance

Financial Statements and Cash Flow

Financial Statements Analysis and Financial Models

Interest Rates and Bond Valuation

Stock Valuation

Net Present Value and Other Investment Rules

Making Capital Investment Decisions

Risk Analysis, Real Options, and Capital Budgeting

Risk and Return: Lessons From Market History

Return and Risk: The Capital Asset Pricing Model Capm

Risk, Cost of Capital, and Valuation

Efficient Capital Markets and Behavioral Challenges

Capital Structure: Basic Concepts

Capital Structure: Limits to the Use of Debt

Dividends and Other Payouts

Options and Corporate Finance

Short-Term Finance and Planning

Raising Capital

International Corporate Finance

Mergers and Acquisitions Web Only

Filters