Question 1

Which of the following statements is CORRECT?

Accepted Answer

A)  if some cash flows occur at the beginning of the periods while others occur at the ends, then we have what the textbook defines as a variable annuity. 
B)  the cash flows for an ordinary (or deferred) annuity all occur at the beginning of the periods. 
C)  if a series of unequal cash flows occurs at regular intervals, such as once a year, then the series is by definition an annuity. 
D)  the cash flows for an annuity due must all occur at the ends of the periods. 
E)  the cash flows for an annuity must all be equal, and they must occur at regular intervals, such as once a year or once a month. 
A)  if some cash flows occur at the beginning of the periods while others occur at the ends, then we have what the textbook defines as a variable annuity. 
B)  the cash flows for an ordinary (or deferred) annuity all occur at the beginning of the periods. 
C)  if a series of unequal cash flows occurs at regular intervals, such as once a year, then the series is by definition an annuity. 
D)  the cash flows for an annuity due must all occur at the ends of the periods. 
E)  the cash flows for an annuity must all be equal, and they must occur at regular intervals, such as once a year or once a month.

Question 2

Cyberhost Corporation's sales were $225 million last year. If sales grow at 6% per year, how large (in millions) will they be 5 years later?

Accepted Answer

A)  $271.74 
B)  $286.05 
C)  $301.10 
D)  $316.16 
E)  $331.96 
A)  $271.74 
B)  $286.05 
C)  $301.10 
D)  $316.16 
E)  $331.96

Question 3

Assume that you own an annuity that will pay you $15,000 per year for 12 years, with the first payment being made today. You need money today to open a new restaurant, and your uncle offers to give you $120,000 for the annuity. If you sell it, what rate of return would your uncle earn on his investment?

Accepted Answer

A)  6.85% 
B)  7.21% 
C)  7.59% 
D)  7.99% 
E)  8.41% 
A)  6.85% 
B)  7.21% 
C)  7.59% 
D)  7.99% 
E)  8.41%

Question 4

How much would Roderick have after 6 years if he has $500 now and leaves it invested at 5.5% with annual compounding?

Accepted Answer

A)  $591.09 
B)  $622.20 
C)  $654.95 
D)  $689.42 
E)  $723.89 
A)  $591.09 
B)  $622.20 
C)  $654.95 
D)  $689.42 
E)  $723.89

Question 5

The present value of a future sum increases as either the discount rate or the number of periods per year increases, other things held constant.

Accepted Answer

A) True 
 B)False

Question 6

Suppose you earned a $275,000 bonus this year and invested it at 8.25% per year. How much could you withdraw at the end of each of the next 20 years?

Accepted Answer

A)  $28,532 
B)  $29,959 
C)  $31,457 
D)  $33,030 
E)  $34,681 
A)  $28,532 
B)  $29,959 
C)  $31,457 
D)  $33,030 
E)  $34,681

Question 7

A U.S. Treasury bond will pay a lump sum of $1,000 exactly 3 years from today. The nominal interest rate is 6%, semiannual compounding. Which of the following statements is CORRECT?

Accepted Answer

A)  the pv of the $1,000 lump sum has a higher present value than the pv of a 3-year, $333.33 ordinary annuity. 
B)  the periodic interest rate is greater than 3%. 
C)  the periodic rate is less than 3%. 
D)  the present value would be greater if the lump sum were discounted back for more periods. 
E)  the present value of the $1,000 would be smaller if interest were compounded monthly rather than semiannually. 
A)  the pv of the $1,000 lump sum has a higher present value than the pv of a 3-year, $333.33 ordinary annuity. 
B)  the periodic interest rate is greater than 3%. 
C)  the periodic rate is less than 3%. 
D)  the present value would be greater if the lump sum were discounted back for more periods. 
E)  the present value of the $1,000 would be smaller if interest were compounded monthly rather than semiannually.

Question 8

At a rate of 6.5%, what is the future value of the following cash flow stream?

Accepted Answer

A)  $526.01 
B)  $553.69 
C)  $582.83 
D)  $613.51 
E)  $645.80 
A)  $526.01 
B)  $553.69 
C)  $582.83 
D)  $613.51 
E)  $645.80

Question 9

Because your mother is about to retire, she wants to buy an annuity that will provide her with $75,000 of income a year for 20 years, with the first payment coming immediately. The going rate on such annuities is 5.25%. How much would it cost her to buy the annuity today?

Accepted Answer

A)  $825,835 
B)  $869,300 
C)  $915,052 
D)  $963,213 
E)  $1,011,374 
A)  $825,835 
B)  $869,300 
C)  $915,052 
D)  $963,213 
E)  $1,011,374

Question 10

Your Aunt Elsa has $500,000 invested at 6.5%, and she plans to retire. She wants to withdraw $40,000 at the beginning of each year, starting immediately. What is the maximum number of whole payments that can be withdrawn before the account is exhausted, i.e., before the account balance would become negative? (Hint: Round down to the nearest whole number.)

Accepted Answer

A)  18 
B)  19 
C)  20 
D)  21 
E)  22 
A)  18 
B)  19 
C)  20 
D)  21 
E)  22

Question 11

All other things held constant, the present value of a given annual annuity decreases as the number of periods per year increases.

Accepted Answer

A) True 
 B)False

Question 12

Suppose a Google.com bond will pay $4,500 ten years from now. If the going interest rate on safe 10-year bonds is 4.25%, how much is the bond worth today?

Accepted Answer

A)  $2,819.52 
B)  $2,967.92 
C)  $3,116.31 
D)  $3,272.13 
E)  $3,435.74 
A)  $2,819.52 
B)  $2,967.92 
C)  $3,116.31 
D)  $3,272.13 
E)  $3,435.74

Question 13

Which of the following statements is CORRECT?

Accepted Answer

A)  time lines cannot be constructed where some of the payments constitute an annuity but others are unequal and thus are not part of the annuity. 
B)  a time line is not meaningful unless all cash flows occur annually. 
C)  time lines are not useful for visualizing complex problems prior to doing actual calculations. 
D)  time lines can be constructed to deal with situations where some of the cash flows occur annually but others occur quarterly. 
E)  time lines can only be constructed for annuities where the payments occur at the end of the periods, i.e., for ordinary annuities. 
A)  time lines cannot be constructed where some of the payments constitute an annuity but others are unequal and thus are not part of the annuity. 
B)  a time line is not meaningful unless all cash flows occur annually. 
C)  time lines are not useful for visualizing complex problems prior to doing actual calculations. 
D)  time lines can be constructed to deal with situations where some of the cash flows occur annually but others occur quarterly. 
E)  time lines can only be constructed for annuities where the payments occur at the end of the periods, i.e., for ordinary annuities.

Question 14

You want to buy new kitchen appliances 2 years from now, and you plan to save $8,200 per year, beginning one year from today. You will deposit your savings in an account that pays 6.2% interest. How much will you have just after you make the 2nd deposit, 2 years from now?

Accepted Answer

A)  $15,260 
B)  $16,063 
C)  $16,908 
D)  $17,754 
E)  $18,642 
A)  $15,260 
B)  $16,063 
C)  $16,908 
D)  $17,754 
E)  $18,642

Question 15

Ten years ago, Kronan Corporation earned $0.50 per share. Its earnings this year were $2.20. What was the growth rate in earnings per share (EPS) over the 10-year period?

Accepted Answer

A)  15.17% 
B)  15.97% 
C)  16.77% 
D)  17.61% 
E)  18.49% 
A)  15.17% 
B)  15.97% 
C)  16.77% 
D)  17.61% 
E)  18.49%

Question 16

You are in negotiations to make a 7-year loan of $25,000 to DeVille Corporation. To repay you, DeVille will pay $2,500 at the end of Year 1, $5,000 at the end of Year 2, and $7,500 at the end of Year 3, plus a fixed but currently unspecified cash flow, X, at the end of each year from Year 4 through Year 7. You are confident the payments will be made, since DeVille is essentially riskless. You regard 8% as an appropriate rate of return on a low risk but illiquid 7-year loan. What cash flow must the investment provide at the end of each of the final 4 years, that is, what is X?

Accepted Answer

A)  $4,271.67 
B)  $4,496.49 
C)  $4,733.15 
D)  $4,969.81 
E)  $5,218.30 
A)  $4,271.67 
B)  $4,496.49 
C)  $4,733.15 
D)  $4,969.81 
E)  $5,218.30

Question 17

What is the present value of the following cash flow stream at a rate of 12.0%?

Accepted Answer

A)  $9,699 
B)  $10,210 
C)  $10,747 
D)  $11,284 
E)  $11,849 
A)  $9,699 
B)  $10,210 
C)  $10,747 
D)  $11,284 
E)  $11,849

Question 18

Time lines can be constructed in situations where some of the cash flows occur annually but others occur quarterly.

Accepted Answer

A) True 
 B)False

Question 19

You want to open a sushi bar 3 years from now, and you plan to save $7,000 per year, beginning immediately. You will make 3 deposits in an account that pays 5.2% interest. Under these assumptions, how much will you have 3 years from today?

Accepted Answer

A)  $20,993 
B)  $22,098 
C)  $23,261 
D)  $24,424 
E)  $25,645 
A)  $20,993 
B)  $22,098 
C)  $23,261 
D)  $24,424 
E)  $25,645

Question 20

Now that your uncle has decided to retire, he wants to buy an annuity that will provide him with $85,000 of income a year for 25 years, with the first payment coming immediately. The going rate on such annuities is 5.15%. How much would it cost him to buy the annuity today?

Accepted Answer

A)  $1,063,968 
B)  $1,119,966 
C)  $1,178,912 
D)  $1,240,960 
E)  $1,303,008 
A)  $1,063,968 
B)  $1,119,966 
C)  $1,178,912 
D)  $1,240,960 
E)  $1,303,008

Exam 28: Time Value of Money

Which of the following statements is CORRECT?

Cyberhost Corporation's sales were $225 million last year. If sales grow at 6% per year, how large (in millions) will they be 5 years later?

How much would Roderick have after 6 years if he has $500 now and leaves it invested at 5.5% with annual compounding?

The present value of a future sum increases as either the discount rate or the number of periods per year increases, other things held constant.

Suppose you earned a $275,000 bonus this year and invested it at 8.25% per year. How much could you withdraw at the end of each of the next 20 years?

A U.S. Treasury bond will pay a lump sum of $1,000 exactly 3 years from today. The nominal interest rate is 6%, semiannual compounding. Which of the following statements is CORRECT?

At a rate of 6.5%, what is the future value of the following cash flow stream?

Because your mother is about to retire, she wants to buy an annuity that will provide her with $75,000 of income a year for 20 years, with the first payment coming immediately. The going rate on such annuities is 5.25%. How much would it cost her to buy the annuity today?

All other things held constant, the present value of a given annual annuity decreases as the number of periods per year increases.

Suppose a Google.com bond will pay $4,500 ten years from now. If the going interest rate on safe 10-year bonds is 4.25%, how much is the bond worth today?

Which of the following statements is CORRECT?

You want to buy new kitchen appliances 2 years from now, and you plan to save $8,200 per year, beginning one year from today. You will deposit your savings in an account that pays 6.2% interest. How much will you have just after you make the 2nd deposit, 2 years from now?

Ten years ago, Kronan Corporation earned $0.50 per share. Its earnings this year were $2.20. What was the growth rate in earnings per share (EPS) over the 10-year period?

What is the present value of the following cash flow stream at a rate of 12.0%?

Time lines can be constructed in situations where some of the cash flows occur annually but others occur quarterly.

You want to open a sushi bar 3 years from now, and you plan to save $7,000 per year, beginning immediately. You will make 3 deposits in an account that pays 5.2% interest. Under these assumptions, how much will you have 3 years from today?

Now that your uncle has decided to retire, he wants to buy an annuity that will provide him with $85,000 of income a year for 25 years, with the first payment coming immediately. The going rate on such annuities is 5.15%. How much would it cost him to buy the annuity today?

An Overview of Financial Management and the Financial Environment

Risk and Return-Part I

Risk and Return-Part II

Bond Valuation

Financial Options

Accounting for Financial Management

Analysis of Financial Statements

Basic Stock Valuation

Corporate Valuation and Financial Planning

Corporate Governance

Determining the Cost of Capital

Capital Budgeting: Decision Criteria

Capital Budgeting-Estimating Cash Flows and Analyzing Risk

Real Options

Distributions to Shareholders-Dividends and Repurchases

Capital Structure Decisions

Dynamic Capital Structures and Corporate Valuation

Initial Public Offerings-Investment Banking: and Financial Restructuring

Lease Financing

Hybrid Financing Preferred Stock-Warrants and Convertibles

Supply Chains and Working Capital Management

Providing and Obtaining Credit

Other Topics in Working Capital Management

Enterprise Risk Management

Bankruptcy-Reorganization and Liquidation

Mergers and Corporate Control

Multinational Financial Management

Basic Financial Tools: A review

Pension Plan Management

Financial Management in Not for Profit Businesses

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