Question 1

Cash flows from an annuity occur every year in the future.

Accepted Answer

A) True 
 B)False

Question 2

Dan buys a property for $210,000. He is offered a 30-year loan by the bank, at an interest rate of 8% per year. What is the annual loan payment Dan must make?

Accepted Answer

A) $18,653.76 
B) $22,384.51 
C) $26,115.26 
D) $29,846.02 
A) $18,653.76 
B) $22,384.51 
C) $26,115.26 
D) $29,846.02

Question 3

A perpetuity has a PV of $20,000. If the interest rate is 6%, how much will the perpetuity pay every year?

Accepted Answer

A) $600 
B) $960 
C) $1200 
D) $720 
A) $600 
B) $960 
C) $1200 
D) $720

Question 4

An annuity pays $10 per year for 98 years. What is the present value (PV)of this annuity given that the discount rate is 7%?

Accepted Answer

A) $85.60 
B) $171.20 
C) $142.67 
D) $199.74 
A) $85.60 
B) $171.20 
C) $142.67 
D) $199.74

Question 5

A perpetuity will pay $1000per year, starting five years after the perpetuity is purchased. What is the future value (FV)of this perpetuity, given that the interest rate is 3%?

Accepted Answer

A) $1456 
B) $19,867 
C) $21,320 
D) There is no solution to this problem. 
A) $1456 
B) $19,867 
C) $21,320 
D) There is no solution to this problem.

Question 6

You are saving money to buy a car. If you save $310 per month starting one month from now at an interest rate of 6%, how much will you be able to spend on the car after saving for 4 years?

Accepted Answer

A) $10,062.20 
B) $20,124.40 
C) $16,770.33 
D) $23,478.46 
A) $10,062.20 
B) $20,124.40 
C) $16,770.33 
D) $23,478.46

Question 7

An annuity is set up that will pay $1500 per year for ten years. What is the present value (PV)of this annuity given that the discount rate is 9%?

Accepted Answer

A) $5776 
B) $9626 
C) $11,551 
D) $13,476 
A) $5776 
B) $9626 
C) $11,551 
D) $13,476

Question 8

Consider the following timeline detailing a stream of cash flows:   If the current market rate of interest is 6%, then the future value (FV)of this stream of cash flows is closest to ________.

Accepted Answer

A) $1723 
B) $1,500 
C) $2068 
D) $2757 
A) $1723 
B) $1,500 
C) $2068 
D) $2757

Question 9

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

Accepted Answer

A) $242 
B) $581 
C) $484 
D) $774 
A) $242 
B) $581 
C) $484 
D) $774

Question 10

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 $12,500 per year. On average, tuition and other costs have historically increased at a rate of 4% per year.
Assuming that college costs continue to increase an average of 4% per year and that all her college savings are invested in an account paying 7% interest, then what is the amount of money she will need to have available at age 18 to pay for all four years of her undergraduate education?

Accepted Answer

This is a two-step problem.
Step 1: Dete

Question 11

A lottery winner will receive $6 million at the end of each of the next twelve years. What is the future value (FV)of her winnings at the time of her final payment, given that the interest rate is 8.6% per year?

Accepted Answer

A) $94.40 million 
B) $118.00 million 
C) $165.20 million 
D) $188.80 million 
A) $94.40 million 
B) $118.00 million 
C) $165.20 million 
D) $188.80 million

Question 12

Ally wishes to leave a provision in her will that $7000 will be paid annually in perpetuity to a local charity. How much must she provide in her will for this perpetuity if the interest rate is 6%?

Accepted Answer

A) $58,334 
B) $93,334 
C) $116,667 
D) $70,000 
A) $58,334 
B) $93,334 
C) $116,667 
D) $70,000

Question 13

You are considering purchasing a new home. You will need to borrow $290,000 to purchase the home. A mortgage company offers you a 20-year fixed rate mortgage (240 months)at   (1% month). If you borrow the money from this mortgage company, your monthly mortgage payment will be closest to ________.

Accepted Answer

A) $2554 
B) $4470 
C) $3193 
D) $5109 
A) $2554 
B) $4470 
C) $3193 
D) $5109

Question 14

A bank is negotiating a loan. The loan can either be paid off as a lump sum of $80,000 at the end of four years, or as equal annual payments at the end of each of the next four years. If the interest rate on the loan is 6%, what annual payments should be made so that both forms of payment are equivalent?

Accepted Answer

A) $14,630 
B) $18,287 
C) $25,602 
D) $29,259 
A) $14,630 
B) $18,287 
C) $25,602 
D) $29,259

Question 15

Faisal has $12,000 in his savings account and can save an additional $3600 per year. If interest rates are 12%, how long will it take his savings to grow to $47,000?

Accepted Answer

A) 4.3 years 
B) 6.3 years 
C) 5.3 years 
D) 7.3 years 
A) 4.3 years 
B) 6.3 years 
C) 5.3 years 
D) 7.3 years

Question 16

Which of the following formulas is INCORRECT?

Accepted Answer

A) PV of a growing annuity = C ×     
B) PV of an annuity = C ×      
  
C) PV of a growing perpetuity =   
D) PV of a perpetuity =   
A) PV of a growing annuity = C ×     
B) PV of an annuity = C ×      
  
C) PV of a growing perpetuity =   
D) PV of a perpetuity =

Question 17

A businessman wants to buy a truck. The dealer offers to sell the truck for either $120,000 now, or six yearly payments of $25,000. Which of the following is closest to the interest rate being offered by the dealer?

Accepted Answer

A) 5.8% 
B) 6.8% 
C) 7.8% 
D) 9.8% 
A) 5.8% 
B) 6.8% 
C) 7.8% 
D) 9.8%

Question 18

A business promises to pay the investor of $6000 today for a payment of $1500 in one year's time, $3000 in two years' time, and $3000 in three years' time. What is the present value of this business opportunity if the interest rate is 6% per year?

Accepted Answer

A) $603.94 
B) $301.97 
C) $724.73 
D) $966.30 
A) $603.94 
B) $301.97 
C) $724.73 
D) $966.30

Question 19

How do the growth perpetuity results differ with negative and positive growths of similar magnitude assuming everything else remains unchanged?

Accepted Answer

The denominator in the formula for growt

Question 20

Which of the following is true about perpetuities?

Accepted Answer

A) All else equal, the present value of a perpetuity is higher when the periodic cash flow is higher. 
B) All else equal, the present value of a perpetuity is higher when the interest rate is lower. 
C) If two perpetuities have the same present value and the same interest rate, they must have the same cash flows. 
D) All of the above are true statements. 
A) All else equal, the present value of a perpetuity is higher when the periodic cash flow is higher. 
B) All else equal, the present value of a perpetuity is higher when the interest rate is lower. 
C) If two perpetuities have the same present value and the same interest rate, they must have the same cash flows. 
D) All of the above are true statements.

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

Cash flows from an annuity occur every year in the future.

Dan buys a property for $210,000. He is offered a 30-year loan by the bank, at an interest rate of 8% per year. What is the annual loan payment Dan must make?

A perpetuity has a PV of $20,000. If the interest rate is 6%, how much will the perpetuity pay every year?

An annuity pays $10 per year for 98 years. What is the present value (PV)of this annuity given that the discount rate is 7%?

A perpetuity will pay $1000per year, starting five years after the perpetuity is purchased. What is the future value (FV)of this perpetuity, given that the interest rate is 3%?

You are saving money to buy a car. If you save $310 per month starting one month from now at an interest rate of 6%, how much will you be able to spend on the car after saving for 4 years?

An annuity is set up that will pay $1500 per year for ten years. What is the present value (PV)of this annuity given that the discount rate is 9%?

Consider the following timeline detailing a stream of cash flows: If the current market rate of interest is 6%, then the future value (FV)of this stream of cash flows is closest to ________.

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

A lottery winner will receive $6 million at the end of each of the next twelve years. What is the future value (FV)of her winnings at the time of her final payment, given that the interest rate is 8.6% per year?

Ally wishes to leave a provision in her will that $7000 will be paid annually in perpetuity to a local charity. How much must she provide in her will for this perpetuity if the interest rate is 6%?

You are considering purchasing a new home. You will need to borrow $290,000 to purchase the home. A mortgage company offers you a 20-year fixed rate mortgage (240 months)at (1% month). If you borrow the money from this mortgage company, your monthly mortgage payment will be closest to ________.

Faisal has $12,000 in his savings account and can save an additional $3600 per year. If interest rates are 12%, how long will it take his savings to grow to $47,000?

Which of the following formulas is INCORRECT?

A businessman wants to buy a truck. The dealer offers to sell the truck for either $120,000 now, or six yearly payments of $25,000. Which of the following is closest to the interest rate being offered by the dealer?

A business promises to pay the investor of $6000 today for a payment of $1500 in one year's time, $3000 in two years' time, and $3000 in three years' time. What is the present value of this business opportunity if the interest rate is 6% per year?

How do the growth perpetuity results differ with negative and positive growths of similar magnitude assuming everything else remains unchanged?

Which of the following is true about perpetuities?

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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