Question 1

Which of the following statements regarding perpetuities is FALSE?

Accepted Answer

A) To find the value of a perpetuity by discounting one cash flow at a time would take forever. 
B) A perpetuity is a stream of equal cash flows that occurs at regular intervals and lasts forever. 
C) PV of a perpetuity =   
D) One example of a perpetuity is the British government bond called a consol. 
A) To find the value of a perpetuity by discounting one cash flow at a time would take forever. 
B) A perpetuity is a stream of equal cash flows that occurs at regular intervals and lasts forever. 
C) PV of a perpetuity =   
D) One example of a perpetuity is the British government bond called a consol. C

Question 2

Suppose you invest $1000 into a mutual fund that is expected to earn a rate of return of 11%. The amount of money will you have in ten years is closest to which of the following? The amount you will have in 50 years is closest to which of the following?

Accepted Answer

A) $1420; $110,739 
B) $2271; $166,109 
C) $2839; $184,565 
D) $3123; $221,478 
A) $1420; $110,739 
B) $2271; $166,109 
C) $2839; $184,565 
D) $3123; $221,478 C

Question 3

Assume that you are 30 years old today, and that you are planning on retirement at age 65. Your current salary is $42,000 and you expect your salary to increase at a rate of 5% per year as long as you work. To save for your retirement, you plan on making annual contributions to a retirement account. Your first contribution will be made on your 31st birthday and will be 8% of this year's salary. Likewise, you expect to deposit 8% of your salary each year until you reach age 65. Assume that the rate of interest is 9%. The present value (PV)(at age 30)of your retirement savings is closest to ________.

Accepted Answer

A) $61,303 
B) $30,652 
C) $42,912 
D) $67,433 
A) $61,303 
B) $30,652 
C) $42,912 
D) $67,433 A

Question 4

If $8000 is invested in a certain business at the start of the year, the investor will receive $2400 at the end of each of the next four years. What is the present value of this business opportunity if the interest rate is 6% per year?

Accepted Answer

A) $158.13 
B) $316.25 
C) $379.50 
D) $506.00 
A) $158.13 
B) $316.25 
C) $379.50 
D) $506.00

Question 5

Clarissa wants to fund a growing perpetuity that will pay $10,000 per year to a local museum, starting next year. She wants the annual amount paid to the museum to grow by 5% per year. Given that the interest rate is 9%, how much does she need to fund this perpetuity?

Accepted Answer

A) $125,000.00 
B) $200,000.00 
C) $300,000.00 
D) $250,000.00 
A) $125,000.00 
B) $200,000.00 
C) $300,000.00 
D) $250,000.00

Question 6

Since your first birthday, your grandparents have been depositing $100 into a savings account every month. The account pays 9% interest annually. Immediately after your grandparents make the deposit on your 18th birthday, the amount of money in your savings account will be closest to ________.

Accepted Answer

A) $32,181 
B) $53,635 
C) $64,362 
D) $75,089 
A) $32,181 
B) $53,635 
C) $64,362 
D) $75,089

Question 7

Joe just inherited the family business, and having no desire to run the family business, he has decided to sell it to an entrepreneur. In exchange for the family business, Joe has been offered an immediate payment of $100,000. Joe will also receive payments of $50,000 in one year, $50,000 in two years, and $75,000 in three years. The current market rate of interest for Joe is 6%.
In terms of present value (PV), how much will Joe receive for selling the family business?

Accepted Answer

PV = $100,000 + $50,

Question 8

Which of the following statements regarding growing perpetuities is FALSE?

Accepted Answer

A) We assume that r < g for a growing perpetuity. 
B) PV of a growing perpetuity =   
C) To find the value of a growing perpetuity one cash flow at a time would take forever. 
D) A growing perpetuity is a cash flow stream that occurs at regular intervals and grows at a constant rate forever. 
A) We assume that r < g for a growing perpetuity. 
B) PV of a growing perpetuity =   
C) To find the value of a growing perpetuity one cash flow at a time would take forever. 
D) A growing perpetuity is a cash flow stream that occurs at regular intervals and grows at a constant rate forever.

Question 9

An annuity pays $47 per year for 22 years. What is the future value (FV)of this annuity at the end of those 22 years, given that the discount rate is 8%?

Accepted Answer

A) $1563.88 
B) $3127.76 
C) $3649.06 
D) $2606.47 
A) $1563.88 
B) $3127.76 
C) $3649.06 
D) $2606.47

Question 10

How long will it take $50,000 placed in a savings account at 10% interest to grow into $75,000?

Accepted Answer

A) 4.25 years 
B) 3.25 years 
C) 5.25 years 
D) 6.25 years 
A) 4.25 years 
B) 3.25 years 
C) 5.25 years 
D) 6.25 years

Question 11

You are considering investing in a zero-coupon bond that will pay you its face value of $1000 in twelve years. If the bond is currently selling for $496.97, then the internal rate of return (IRR)for investing in this bond is closest to ________.

Accepted Answer

A) 5.0% 
B) 7.1% 
C) 6.0% 
D) 8.2% 
A) 5.0% 
B) 7.1% 
C) 6.0% 
D) 8.2%

Question 12

Which of the following is true about perpetuities?

Accepted Answer

A) Since a perpetuity generates cash flows every period infinitely, the cash flow generated equals the PV times the interest rate. 
B) Since a perpetuity generates cash flows every period infinitely, initial cash outflow must be discounted to calculate the present value. 
C) Since a perpetuity generates cash flows every period infinitely, there is no way to solve for the cash flow using the present value and the interest rate. 
D) Since a perpetuity generates cash flows every period infinitely, its FV is the same as its PV. 
A) Since a perpetuity generates cash flows every period infinitely, the cash flow generated equals the PV times the interest rate. 
B) Since a perpetuity generates cash flows every period infinitely, initial cash outflow must be discounted to calculate the present value. 
C) Since a perpetuity generates cash flows every period infinitely, there is no way to solve for the cash flow using the present value and the interest rate. 
D) Since a perpetuity generates cash flows every period infinitely, its FV is the same as its PV.

Question 13

A growing perpetuity, where the rate of growth is greater than the discount rate, will have an infinitely large present value (PV).

Accepted Answer

A) True 
 B)False

Question 14

You are interested in purchasing a new automobile that costs $33,000. The dealership offers you a special financing rate of   (0.75% per month)for 60 months. Assuming that you do not make a down payment on the auto and you take the dealer's financing deal, then your monthly car payments would be closest to ________.

Accepted Answer

A) $548 
B) $685 
C) $959 
D) $1096 
A) $548 
B) $685 
C) $959 
D) $1096

Question 15

Suppose that a young couple has just had their first baby and they wish to ensure that enough money will be available to pay for their child's college education. Currently, college tuition, books, fees, and other costs average $12,000 per year. On average, tuition and other costs have historically increased at a rate of 5% per year. Assuming that college costs continue to increase an average of 5% per year and that all her college savings are invested in an account paying 8% interest, then the amount of money she will need to have available at age 18 to pay for all four years of her undergraduate education is closest to ________.

Accepted Answer

A) $110,793 
B) $55,397 
C) $77,555 
D) $132,952 
A) $110,793 
B) $55,397 
C) $77,555 
D) $132,952

Question 16

A homeowner in a sunny climate has the opportunity to install a solar water heater in his home for a cost of $2900. After installation the solar water heater will produce a small amount of hot water every day, forever, and will require no maintenance. How much must the homeowner save on water heating costs every year if this is to be a sound investment? (The interest rate is 5% per year.)

Accepted Answer

A) $145 
B) $160 
C) $175 
D) $190 
A) $145 
B) $160 
C) $175 
D) $190

Question 17

Can we apply the growing perpetuity equation for negative growth as well?

Accepted Answer

Yes, it is perfectly in order to apply t

Question 18

Consider the following timeline detailing a stream of cash flows:   If the current market rate of interest is 8%, then the future value (FV)of this stream of cash flows is closest to ________.

Accepted Answer

A) $11,699 
B) $5850 
C) $14,039 
D) $18,718 
A) $11,699 
B) $5850 
C) $14,039 
D) $18,718

Question 19

A bank offers a home buyer a 20-year loan at 8% per year. If the home buyer borrows $130,000 from the bank, how much must be repaid every year?

Accepted Answer

A) $15,888.95 
B) $18,537.11 
C) $21,185.26 
D) $13,240.79 
A) $15,888.95 
B) $18,537.11 
C) $21,185.26 
D) $13,240.79

Question 20

Trial and error is the only way to compute the internal rate of return (IRR)when interest is calculated over five or more periods.

Accepted Answer

A) True 
 B)False

Exam 4: Time Value of Money: Valuing Cash Flow Streams

Which of the following statements regarding perpetuities is FALSE?

Suppose you invest $1000 into a mutual fund that is expected to earn a rate of return of 11%. The amount of money will you have in ten years is closest to which of the following? The amount you will have in 50 years is closest to which of the following?

If $8000 is invested in a certain business at the start of the year, the investor will receive $2400 at the end of each of the next four years. What is the present value of this business opportunity if the interest rate is 6% per year?

Clarissa wants to fund a growing perpetuity that will pay $10,000 per year to a local museum, starting next year. She wants the annual amount paid to the museum to grow by 5% per year. Given that the interest rate is 9%, how much does she need to fund this perpetuity?

Since your first birthday, your grandparents have been depositing $100 into a savings account every month. The account pays 9% interest annually. Immediately after your grandparents make the deposit on your 18th birthday, the amount of money in your savings account will be closest to ________.

Which of the following statements regarding growing perpetuities is FALSE?

An annuity pays $47 per year for 22 years. What is the future value (FV)of this annuity at the end of those 22 years, given that the discount rate is 8%?

How long will it take $50,000 placed in a savings account at 10% interest to grow into $75,000?

You are considering investing in a zero-coupon bond that will pay you its face value of $1000 in twelve years. If the bond is currently selling for $496.97, then the internal rate of return (IRR)for investing in this bond is closest to ________.

Which of the following is true about perpetuities?

A growing perpetuity, where the rate of growth is greater than the discount rate, will have an infinitely large present value (PV).

Can we apply the growing perpetuity equation for negative growth as well?

Consider the following timeline detailing a stream of cash flows: If the current market rate of interest is 8%, then the future value (FV)of this stream of cash flows is closest to ________.

A bank offers a home buyer a 20-year loan at 8% per year. If the home buyer borrows $130,000 from the bank, how much must be repaid every year?

Trial and error is the only way to compute the internal rate of return (IRR)when interest is calculated over five or more periods.

Corporate Finance and the Financial Manager

Introduction to Financial Statement Analysis

Time Value of Money: an Introduction

Interest Rates

Bonds

Stock Valuation

Investment Decision Rules

Fundamentals of Capital Budgeting

Stock Valuation: a Second Look

Risk and Return in Capital Markets

Systematic Risk and the Equity Risk Premium

The Cost of Capital

Raising Equity Capital

Debt Financing

Capital Structure

Payout Policy

Financial Modeling and Pro Forma Analysis

Working Capital Management

Short-Term Financial Planning

Option Applications and Corporate Finance

Mergers and Acquisitions

International Corporate Finance

Leasing

Insurance and Risk Management

Corporate Governance

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