Question 1

A growing perpetuity is currently valued $6,225.81.The next annuity payment will be $386 and the discount rate is 9 percent.What is the annuity's rate of growth?

Accepted Answer

A) 2.45 percent 
B) 3.10 percent 
C) 2.80 percent 
D) 2.50 percent 
E) 2.95 percent 
A) 2.45 percent 
B) 3.10 percent 
C) 2.80 percent 
D) 2.50 percent 
E) 2.95 percent

Question 2

Ted purchased an annuity today that will pay $1,000 a month for five years.He received his first monthly payment today.Allison purchased an annuity today that will pay $1,000 a month for five years.She will receive her first payment one month from today.Which one of the following statements is correct concerning these two annuities?

Accepted Answer

A) Both annuities are of equal value today. 
B) Allison's annuity is an annuity due. 
C) Ted's annuity has a higher present value than Allison's. 
D) Allison's annuity has a higher present value than Ted's. 
E) Ted's annuity is an ordinary annuity. 
A) Both annuities are of equal value today. 
B) Allison's annuity is an annuity due. 
C) Ted's annuity has a higher present value than Allison's. 
D) Allison's annuity has a higher present value than Ted's. 
E) Ted's annuity is an ordinary annuity.

Question 3

Olivia is willing to pay $185 a month for four years for a car payment.If the interest rate is 4.9 percent,compounded monthly,and she has a cash down payment of $2,500,what price car can she afford to purchase?

Accepted Answer

A) $10,961.36 
B) $10,549.07 
C) $8,533.84 
D) $8,686.82 
E) $8,342.05 
A) $10,961.36 
B) $10,549.07 
C) $8,533.84 
D) $8,686.82 
E) $8,342.05

Question 4

Assume you borrow $6,600 for three years.How much will you still owe after the three years if you pay all of the payments as set forth in the loan's amortization schedule?

Accepted Answer

A) $6,500 
B) $0 
C) $2,200 
D) $3,150 
E) $2,650 
A) $6,500 
B) $0 
C) $2,200 
D) $3,150 
E) $2,650

Question 5

There are multiple factors that affect the value of an annuity.Explain what these four factors are and discuss how a change in each factor will impact both the present value and the future value of the annuity.

Accepted Answer

The factors are the interest rate,paymen

Question 6

Christina will receive annuity payments of $1,200 a year for five years,with the first payment occurring at Year 4.What is the value of this annuity to her today at a discount rate of 7.25 percent?

Accepted Answer

A) $4,209.19 
B) $4,774.04 
C) $3,961.80 
D) $4,887.48 
E) $4,111.08 
A) $4,209.19 
B) $4,774.04 
C) $3,961.80 
D) $4,887.48 
E) $4,111.08

Question 7

Anna's grandmother established a trust and deposited $250,000 into it.The trust pays a guaranteed 4.25 percent rate of return.Anna will receive all the interest earnings on an annual basis and a charity will receive the principal amount at Anna's passing.How much income will Anna receive each year?

Accepted Answer

A) $10,000 
B) $8,500 
C) $12,400 
D) $10,625 
E) $12,750 
A) $10,000 
B) $8,500 
C) $12,400 
D) $10,625 
E) $12,750

Question 8

At a discount rate of 5 percent,which one of the following is the correct formula for computing the PV of $1 to be received one year from today?

Accepted Answer

A) $1/1.05 
B) $1 
C) $1 × 1.05 
D) $1 × 1.052 
E) $1/1.052 
A) $1/1.05 
B) $1 
C) $1 × 1.05 
D) $1 × 1.052 
E) $1/1.052

Question 9

You are comparing two investment options,each of which will provide $15,000 of total income.Option A pays five annual payments starting with $5,000 the first year followed by four annual payments of $2,500 each.Option B pays five annual payments of $3,000 each.Which one of the following statements is correct given these two investment options?

Accepted Answer

A) Both options are of equal value today. 
B) Given a positive rate of return,Option A is worth more today than Option B. 
C) Option B has a higher present value than Option A given a positive rate of return. 
D) Option B has a lower present value than Option A given a zero rate of return. 
E) Option A is preferable because it is an annuity due. 
A) Both options are of equal value today. 
B) Given a positive rate of return,Option A is worth more today than Option B. 
C) Option B has a higher present value than Option A given a positive rate of return. 
D) Option B has a lower present value than Option A given a zero rate of return. 
E) Option A is preferable because it is an annuity due.

Question 10

TH Manufacturers expects to generate cash flows of $129,600 for the next two years.At the end of the two years the business will be sold for an estimated $3.2 million.What is the value of this business at a discount rate of 14 percent?

Accepted Answer

A) $2,704,655 
B) $2,284,644 
C) $2,675,703 
D) $2,848,392 
E) $2,900,411 
A) $2,704,655 
B) $2,284,644 
C) $2,675,703 
D) $2,848,392 
E) $2,900,411

Question 11

What rate of return should be used to compute the NPV of a proposed purchase of Smiley's,an operating business?

Accepted Answer

A) A discount rate equal to Smiley's current return on equity 
B) The discount rate applicable to other investments with similar risks 
C) A discount rate equal to Smiley's net profit percentage 
D) The rate of interest charged by a bank for a loan similar in size to the cost of the purchase 
E) A discount rate that makes the NPV of the proposed purchase positive 
A) A discount rate equal to Smiley's current return on equity 
B) The discount rate applicable to other investments with similar risks 
C) A discount rate equal to Smiley's net profit percentage 
D) The rate of interest charged by a bank for a loan similar in size to the cost of the purchase 
E) A discount rate that makes the NPV of the proposed purchase positive

Question 12

Suzette is receiving $10,000 today,$15,000 one year from today,and $25,000 four years from today.If she invests these funds immediately and earns 9.6 percent annually,how much will she have in savings 30 years from today?

Accepted Answer

A) $586,124.93 
B) $591,414.14 
C) $646,072.91 
D) $620,008.77 
E) $641,547.39 
A) $586,124.93 
B) $591,414.14 
C) $646,072.91 
D) $620,008.77 
E) $641,547.39

Question 13

Tobi owns a perpetuity that will pay $1,500 a year,starting one year from now.He offers to sell you all the payments remaining after the first 25 payments have been paid.What price should you offer him today for payments 26 onward if the discount rate is 8 percent? What does your offer price illustrate about the value of perpetuities?

Accepted Answer

Perpetuity value: PV = $1,500/.08 PV = $

Question 14

Eleven years ago,a guitar cost $1,800.Today,that same guitar costs $3,650.What has been the inflation rate on this instrument?

Accepted Answer

A) 6.64 percent 
B) 6.32 percent 
C) 6.57 percent 
D) 6.81 percent 
E) 6.49 percent 
A) 6.64 percent 
B) 6.32 percent 
C) 6.57 percent 
D) 6.81 percent 
E) 6.49 percent

Question 15

An interest rate that is compounded monthly,but is expressed as if the rate were compounded annually,is called the ________ rate.

Accepted Answer

A) stated interest 
B) compound interest 
C) effective annual 
D) periodic interest 
E) daily interest 
A) stated interest 
B) compound interest 
C) effective annual 
D) periodic interest 
E) daily interest

Question 16

Over the next three years,Marti plans to save $2,000,$2,500,and $3,000,respectively,starting one year from today.You want to have as much money as Marti does three years from now but you plan to make one lump sum investment today.What amount must you save today if you both earn 4.65 annually?

Accepted Answer

A) $6,811.50 
B) $6,791.42 
C) $7,128.23 
D) $6,607.23 
E) $7,500.00 
A) $6,811.50 
B) $6,791.42 
C) $7,128.23 
D) $6,607.23 
E) $7,500.00

Question 17

The preferred stock of ABC Co.offers a rate of return of 7.87 percent.The stock is currently priced at $63.53 per share.What is the amount of the annual dividend?

Accepted Answer

A) $5.20 
B) $5.00 
C) $4.60 
D) $5.50 
E) $6.00 
A) $5.20 
B) $5.00 
C) $4.60 
D) $5.50 
E) $6.00

Question 18

You are comparing two annuities with equal present values.The applicable discount rate is 6.5 percent.One annuity will pay $2,000 annually,starting today,for 20 years.The second annuity will pay annually,starting one year from today,for 20 years.What is the annual payment for the second annuity?

Accepted Answer

A) $2,225 
B) $2,075 
C) $2,000 
D) $2,130 
E) $2,405 
A) $2,225 
B) $2,075 
C) $2,000 
D) $2,130 
E) $2,405

Question 19

An annuity stream of cash flow payments is a set of:

Accepted Answer

A) equal cash flows occurring at equal periods of time over a fixed length of time. 
B) equal cash flows occurring each time period forever. 
C) either equal or varying cash flows occurring at set intervals of time for a fixed period. 
D) increasing cash flows occurring at set intervals of time that go on forever. 
E) arbitrary cash flows occurring each time period for no more than 10 years. 
A) equal cash flows occurring at equal periods of time over a fixed length of time. 
B) equal cash flows occurring each time period forever. 
C) either equal or varying cash flows occurring at set intervals of time for a fixed period. 
D) increasing cash flows occurring at set intervals of time that go on forever. 
E) arbitrary cash flows occurring each time period for no more than 10 years.

Question 20

You expect an investment to return $11,300,$14,600,$21,900,and $38,400 annually over the next four years,respectively.What is this investment worth to you today if you desire a rate of return of 16.5 percent?

Accepted Answer

A) $64,253.91 
B) $58,700.89 
C) $63,732.41 
D) $55,153.57 
E) $59,928.16 
A) $64,253.91 
B) $58,700.89 
C) $63,732.41 
D) $55,153.57 
E) $59,928.16

Exam 4: Discounted Cash Flow Valuation

A growing perpetuity is currently valued $6,225.81.The next annuity payment will be $386 and the discount rate is 9 percent.What is the annuity's rate of growth?

Olivia is willing to pay $185 a month for four years for a car payment.If the interest rate is 4.9 percent,compounded monthly,and she has a cash down payment of $2,500,what price car can she afford to purchase?

Assume you borrow $6,600 for three years.How much will you still owe after the three years if you pay all of the payments as set forth in the loan's amortization schedule?

There are multiple factors that affect the value of an annuity.Explain what these four factors are and discuss how a change in each factor will impact both the present value and the future value of the annuity.

Christina will receive annuity payments of $1,200 a year for five years,with the first payment occurring at Year 4.What is the value of this annuity to her today at a discount rate of 7.25 percent?

Anna's grandmother established a trust and deposited $250,000 into it.The trust pays a guaranteed 4.25 percent rate of return.Anna will receive all the interest earnings on an annual basis and a charity will receive the principal amount at Anna's passing.How much income will Anna receive each year?

At a discount rate of 5 percent,which one of the following is the correct formula for computing the PV of $1 to be received one year from today?

TH Manufacturers expects to generate cash flows of $129,600 for the next two years.At the end of the two years the business will be sold for an estimated $3.2 million.What is the value of this business at a discount rate of 14 percent?

What rate of return should be used to compute the NPV of a proposed purchase of Smiley's,an operating business?

Suzette is receiving $10,000 today,$15,000 one year from today,and $25,000 four years from today.If she invests these funds immediately and earns 9.6 percent annually,how much will she have in savings 30 years from today?

Eleven years ago,a guitar cost $1,800.Today,that same guitar costs $3,650.What has been the inflation rate on this instrument?

An interest rate that is compounded monthly,but is expressed as if the rate were compounded annually,is called the ________ rate.

Over the next three years,Marti plans to save $2,000,$2,500,and $3,000,respectively,starting one year from today.You want to have as much money as Marti does three years from now but you plan to make one lump sum investment today.What amount must you save today if you both earn 4.65 annually?

The preferred stock of ABC Co.offers a rate of return of 7.87 percent.The stock is currently priced at $63.53 per share.What is the amount of the annual dividend?

You are comparing two annuities with equal present values.The applicable discount rate is 6.5 percent.One annuity will pay $2,000 annually,starting today,for 20 years.The second annuity will pay annually,starting one year from today,for 20 years.What is the annual payment for the second annuity?

An annuity stream of cash flow payments is a set of:

You expect an investment to return $11,300,$14,600,$21,900,and $38,400 annually over the next four years,respectively.What is this investment worth to you today if you desire a rate of return of 16.5 percent?

Introduction to Corporate Finance

Financial Statements and Cash Flow

Financial Statements and Cash Flow

Net Present Value and Other Investment Rules

Making Capital Investment Decisions

Risk Analysis, real Options, and Capital Budgeting

Interest Rates and Bond Valuation

Stock Valuation

Lessons From Market History

Return, risk, and the Capital Asset Pricing Model Capm

An Alternative View of Risk and Return: the Arbitrage Pricing Theory

Risk, cost of Capital, and Valuation

Efficient Capital Markets and Behavioral Challenges

Long-Term Financing

Capital Structure: Basic Concepts

Capital Structure: Limits to the Use of Debt

Valuation and Capital Budgeting for the Levered Firm

Dividends and Other Payouts

Raising Capital

Leasing

Options and Corporate Finance

Options and Corporate Finance: Extensions and Applications

Warrants and Convertibles

Derivatives and Hedging Risk

Short-Term Finance and Planning

Cash Management

Credit and Inventory Management

Mergers,acquisitions,and Divestitures

Financial Distress

International Corporate Finance

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