Question 1

What is the present value of $6,811 to be received in one year if the discount rate is 6.5 percent?

Accepted Answer

A) $6,395.31 
B) $6,023.58 
C) $6,643.29 
D) $6,671.13 
E) $7,253.72 
A) $6,395.31 
B) $6,023.58 
C) $6,643.29 
D) $6,671.13 
E) $7,253.72

Question 2

Donaldson's purchased some property for $1.2 million,paid 25 percent down in cash,and financed the balance for 12 years at 7.2 percent,compounded monthly.What is the amount of each monthly mortgage payment?

Accepted Answer

A) $8,440.01 
B) $8,978.26 
C) $9,351.66 
D) $9,399.18 
E) $9,513.67 
A) $8,440.01 
B) $8,978.26 
C) $9,351.66 
D) $9,399.18 
E) $9,513.67

Question 3

The pawn shop adds 2 percent to loan balances for every two weeks a loan is outstanding.What is the effective annual rate of interest?

Accepted Answer

A) 79.97 percent 
B) 73.08 percent 
C) 51.21 percent 
D) 67.34 percent 
E) 83.43 percent 
A) 79.97 percent 
B) 73.08 percent 
C) 51.21 percent 
D) 67.34 percent 
E) 83.43 percent

Question 4

A flow of unending annual payments that increase by a set percentage each year and occur at regular intervals of time is called a(n):

Accepted Answer

A) annuity due. 
B) growing annuity. 
C) growing perpetuity. 
D) variable annuity. 
E) variable perpetuity. 
A) annuity due. 
B) growing annuity. 
C) growing perpetuity. 
D) variable annuity. 
E) variable perpetuity.

Question 5

You need some money today and the only friend you have that has any is your 'miserly' friend.He agrees to loan you the money you need,if you make payments of $20 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 1.5 percent interest per month.How much total interest does he expect to earn?

Accepted Answer

A) $3.94 
B) $4.35 
C) $1.34 
D) $3.63 
E) $5.96 
A) $3.94 
B) $4.35 
C) $1.34 
D) $3.63 
E) $5.96

Question 6

Given a stated interest rate,which form of compounding will yield the highest effective rate of interest?

Accepted Answer

A) Annual compounding 
B) Monthly compounding 
C) Daily compounding 
D) Continuous compounding 
E) Semiannual compounding 
A) Annual compounding 
B) Monthly compounding 
C) Daily compounding 
D) Continuous compounding 
E) Semiannual compounding

Question 7

U Do It Centers deposited $3,200 in an account two years ago and is depositing another $5,000 today.A final deposit of $3,500 will be made one year from now.What will the account balance be three years from now if the account pays 4.85 percent interest,compounded annually?

Accepted Answer

A) $13,033.95 
B) $13,430.84 
C) $12,431.05 
D) $14,328.90 
E) $13,666.10 
A) $13,033.95 
B) $13,430.84 
C) $12,431.05 
D) $14,328.90 
E) $13,666.10

Question 8

Kay owns two annuities that will each pay $500 a month for the next 12 years.One payment is received at the beginning of each month while the other is received at the end of each month.At a discount rate of 7.25 percent,compounded monthly,what is the difference in the present values of these annuities?

Accepted Answer

A) $289.98 
B) $265.42 
C) $299.01 
D) $308.00 
E) $312.50 
A) $289.98 
B) $265.42 
C) $299.01 
D) $308.00 
E) $312.50

Question 9

You would be making a wise decision if you chose to:

Accepted Answer

A) base decisions regarding investments on effective rates and base decisions regarding loans on annual percentage rates. 
B) assume all loans and investments are based on simple interest. 
C) accept the loan with the lower effective annual rate rather than the loan with the lower annual percentage rate. 
D) invest in an account paying 6 percent,compounded quarterly,rather than an account paying 6 percent,compounded monthly. 
E) ignore the effective rates and concentrate on the annual percentage rates for all transactions. 
A) base decisions regarding investments on effective rates and base decisions regarding loans on annual percentage rates. 
B) assume all loans and investments are based on simple interest. 
C) accept the loan with the lower effective annual rate rather than the loan with the lower annual percentage rate. 
D) invest in an account paying 6 percent,compounded quarterly,rather than an account paying 6 percent,compounded monthly. 
E) ignore the effective rates and concentrate on the annual percentage rates for all transactions.

Question 10

You plan to invest $6,500 for three years at 4 percent simple interest.What will your investment be worth at the end of the three years?

Accepted Answer

A) $7,280.00 
B) $7,311.62 
C) $7,250.00 
D) $6,924.32 
E) $6,760.00 
A) $7,280.00 
B) $7,311.62 
C) $7,250.00 
D) $6,924.32 
E) $6,760.00

Question 11

You are considering two projects.Project A has projected cash flows of $6,500,$4,500,and $2,500 for the next three years,respectively.Project B has projected cash flows of $2,500,$4,500,and $6,500 for the next three years,respectively.Assuming both projects have the same initial cost,you know that:

Accepted Answer

A) there are no conditions under which the projects can have equal values. 
B) Project B has a higher net present value than Project A. 
C) Project A is more valuable than Project B given a positive discount rate. 
D) both projects offer the same rate of return. 
E) both projects have equal net present values at any discount rate. 
A) there are no conditions under which the projects can have equal values. 
B) Project B has a higher net present value than Project A. 
C) Project A is more valuable than Project B given a positive discount rate. 
D) both projects offer the same rate of return. 
E) both projects have equal net present values at any discount rate.

Question 12

The Smart Bank wants to be competitive based on quoted loan rates and thus must offer loans at an annual percentage rate of 7.9 percent.What is the maximum rate the bank can actually earn based on this quoted rate?

Accepted Answer

A) 7.90 percent 
B) 8.18 percent 
C) 8.20 percent 
D) 8.22 percent 
E) 8.39 percent 
A) 7.90 percent 
B) 8.18 percent 
C) 8.20 percent 
D) 8.22 percent 
E) 8.39 percent

Question 13

On the day she retired,Kate had $101,900 in retirement savings.She expects to earn 4.5 percent,compounded monthly,and live 24 more years.How much can she withdraw from her savings each month during her retirement if she plans to die on the day she spends her last penny?

Accepted Answer

A) $592.07 
B) $609.21 
C) $539.87 
D) $604.86 
E) $579.22 
A) $592.07 
B) $609.21 
C) $539.87 
D) $604.86 
E) $579.22

Question 14

An annuity costs $70,000 today,pays $3,500 a year,and earns a return of 4.5 percent.What is the length of the annuity time period?

Accepted Answer

A) 54.96 years 
B) 49.48 years 
C) 52.31 years 
D) 43.08 years 
E) 48.00 years 
A) 54.96 years 
B) 49.48 years 
C) 52.31 years 
D) 43.08 years 
E) 48.00 years

Question 15

Your credit card company charges you 1.35 percent per month.What is the annual percentage rate on your account?

Accepted Answer

A) 16.45 percent 
B) 16.30 percent 
C) 16.39 percent 
D) 16.20 percent 
E) 16.56 percent 
A) 16.45 percent 
B) 16.30 percent 
C) 16.39 percent 
D) 16.20 percent 
E) 16.56 percent

Question 16

The interest rate charged per period multiplied by the number of periods per year is called the ________ rate.

Accepted Answer

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

Question 17

Assume you could invest $25,000 at a continuously compounded rate of 10 percent.What would your investment be worth at the end of 50 years?

Accepted Answer

A) $2,933,054 
B) $3,500,824 
C) $3,911,215 
D) $3,710,329 
E) $3,648,029 
A) $2,933,054 
B) $3,500,824 
C) $3,911,215 
D) $3,710,329 
E) $3,648,029

Question 18

Jenni's Diner has expected net annual cash flows of $16,200,$18,600,$19,100,and $19,500 for the next four years,respectively.At the end of the fourth year,the diner is expected to be worth $57,900 cash.What is the present value of the diner at a discount rate of 11.6 percent?

Accepted Answer

A) $93,090.25 
B) $87,492.16 
C) $101,016.38 
D) $104,998.02 
E) $98,411.20 
A) $93,090.25 
B) $87,492.16 
C) $101,016.38 
D) $104,998.02 
E) $98,411.20

Question 19

Denise will receive annual payments of $10,000 for the next 25 years.The discount rate is 6.8 percent.What is the difference in the present value of these payments if they are paid at the beginning of each year rather than at the end of each year?

Accepted Answer

A) $8,069.29 
B) $9,216.67 
C) $9,706.67 
D) $8,382.04 
E) $8,850.00 
A) $8,069.29 
B) $9,216.67 
C) $9,706.67 
D) $8,382.04 
E) $8,850.00

Question 20

Your parents plan to give you $200 a month for four years while you are in college.At a discount rate of 6 percent,compounded monthly,what are these payments worth to you when you first start college?

Accepted Answer

A) $8,797.40 
B) $8,409.56 
C) $8,198.79 
D) $8,516.06 
E) $8,279.32 
A) $8,797.40 
B) $8,409.56 
C) $8,198.79 
D) $8,516.06 
E) $8,279.32

Exam 4: Discounted Cash Flow Valuation

What is the present value of $6,811 to be received in one year if the discount rate is 6.5 percent?

Donaldson's purchased some property for $1.2 million,paid 25 percent down in cash,and financed the balance for 12 years at 7.2 percent,compounded monthly.What is the amount of each monthly mortgage payment?

The pawn shop adds 2 percent to loan balances for every two weeks a loan is outstanding.What is the effective annual rate of interest?

A flow of unending annual payments that increase by a set percentage each year and occur at regular intervals of time is called a(n):

Given a stated interest rate,which form of compounding will yield the highest effective rate of interest?

U Do It Centers deposited $3,200 in an account two years ago and is depositing another $5,000 today.A final deposit of $3,500 will be made one year from now.What will the account balance be three years from now if the account pays 4.85 percent interest,compounded annually?

You would be making a wise decision if you chose to:

You plan to invest $6,500 for three years at 4 percent simple interest.What will your investment be worth at the end of the three years?

You are considering two projects.Project A has projected cash flows of $6,500,$4,500,and $2,500 for the next three years,respectively.Project B has projected cash flows of $2,500,$4,500,and $6,500 for the next three years,respectively.Assuming both projects have the same initial cost,you know that:

The Smart Bank wants to be competitive based on quoted loan rates and thus must offer loans at an annual percentage rate of 7.9 percent.What is the maximum rate the bank can actually earn based on this quoted rate?

On the day she retired,Kate had $101,900 in retirement savings.She expects to earn 4.5 percent,compounded monthly,and live 24 more years.How much can she withdraw from her savings each month during her retirement if she plans to die on the day she spends her last penny?

An annuity costs $70,000 today,pays $3,500 a year,and earns a return of 4.5 percent.What is the length of the annuity time period?

Your credit card company charges you 1.35 percent per month.What is the annual percentage rate on your account?

The interest rate charged per period multiplied by the number of periods per year is called the ________ rate.

Assume you could invest $25,000 at a continuously compounded rate of 10 percent.What would your investment be worth at the end of 50 years?

Jenni's Diner has expected net annual cash flows of $16,200,$18,600,$19,100,and $19,500 for the next four years,respectively.At the end of the fourth year,the diner is expected to be worth $57,900 cash.What is the present value of the diner at a discount rate of 11.6 percent?

Denise will receive annual payments of $10,000 for the next 25 years.The discount rate is 6.8 percent.What is the difference in the present value of these payments if they are paid at the beginning of each year rather than at the end of each year?

Your parents plan to give you $200 a month for four years while you are in college.At a discount rate of 6 percent,compounded monthly,what are these payments worth to you when you first start college?

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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