Question 1

Define the following terms:
(a) perpetuity
(b) annuity
(c) growing perpetuity
(d) growing annuity

Accepted Answer

(a) A perpetuity is a stream of equal cash flows that occurs at regular intervals and lasts forever.
(b) An annuity is a stream of N equal cash flows paid at regular intervals.
(c) A growing perpetuity is a cash flow stream that occurs at regular intervals and grows at a constant rate forever.
(d) A growing annuity is a stream of N growing cash flows, paid at regular intervals.

Question 2

If the current rate of interest is 7%, then the future value (FV) of an investment that pays $1200 per year and lasts 18 years is closest to ________.

Accepted Answer

A)  $24,479 
B)  $40,799 
C)  $48,959 
D)  $57,119 
A)  $24,479 
B)  $40,799 
C)  $48,959 
D)  $57,119 B

Question 3

Assume that you are 30 years old today, and that you are planning on retirement at age 65. You expect your salary to be $40,000 one year from now and you also 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 10%.
The future value (FV) at retirement (age 65) of your savings is closest to ________.

Accepted Answer

A)  $722,766 
B)  $1,445,531 
C)  $1,011,872 
D)  $1,590,084 
A)  $722,766 
B)  $1,445,531 
C)  $1,011,872 
D)  $1,590,084 B

Question 4

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 5

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 6

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

Accepted Answer

Yes, it is perfectly in order to apply t

Question 7

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.

Question 8

A perpetuity will pay $1000 per 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 9

Assume that you are 30 years old today, and that you are planning on retirement at age 65. You expect your salary to be $42,000 one year from now and you also 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

Question 10

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 11

You are borrowing money to buy a car. If you can make payments of $320 per month starting one month from now at an interest rate of 12%, how much will you be able to borrow for the car today if you finance the amount over 4 years?

Accepted Answer

A)  $7291.00 
B)  $14,582.00 
C)  $17,012.34 
D)  $12,151.67 
A)  $7291.00 
B)  $14,582.00 
C)  $17,012.34 
D)  $12,151.67

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

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 14

Martin wants to provide money in his will for an annual bequest to whichever of his living relatives is oldest. That bequest will provide $4000 in the first year, and will grow by 7% per year, forever. If the interest rate is 9%, how much must Martin provide to fund this bequest?

Accepted Answer

A)  $100,000.00 
B)  $160,000.00 
C)  $200,000.00 
D)  $240,000.00 
A)  $100,000.00 
B)  $160,000.00 
C)  $200,000.00 
D)  $240,000.00

Question 15

You are given two choices of investments, Investment A and Investment B. Both investments have the same future cash flows. Investment A has a discount rate of 4%, and Investment B has a discount rate of 5%. Which of the following is true?

Accepted Answer

A)  The present value of cash flows in Investment A is higher than the present value of cash flows in Investment B. 
B)  The present value of cash flows in Investment A is lower than the present value of cash flows in Investment B. 
C)  The present value of cash flows in Investment A is equal to the present value of cash flows in Investment B. 
D)  No comparison can be made-we need to know the cash flows to calculate the present value. 
A)  The present value of cash flows in Investment A is higher than the present value of cash flows in Investment B. 
B)  The present value of cash flows in Investment A is lower than the present value of cash flows in Investment B. 
C)  The present value of cash flows in Investment A is equal to the present value of cash flows in Investment B. 
D)  No comparison can be made-we need to know the cash flows to calculate the present value.

Question 16

The present value (PV) of a stream of cash flows is just the sum of the present values of each individual cash flow.

Accepted Answer

A) True 
 B)False

Question 17

An investment pays you $30,000 at the end of this year, and $15,000 at the end of each of the four following years. What is the present value (PV) of this investment, given that the interest rate is 5% per year?

Accepted Answer

A)  $39,614 
B)  $63,382 
C)  $79,228 
D)  $95,074 
A)  $39,614 
B)  $63,382 
C)  $79,228 
D)  $95,074

Question 18

A perpetuity will pay $900 per year, starting five years after the perpetuity is purchased. What is the present value (PV) of this perpetuity on the date that it is purchased, given that the interest rate is 11%?

Accepted Answer

A)  $2695 
B)  $4312 
C)  $5390 
D)  $3234 
A)  $2695 
B)  $4312 
C)  $5390 
D)  $3234

Question 19

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 20

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

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

Define the following terms: (a) perpetuity (b) annuity (c) growing perpetuity (d) growing annuity

If the current rate of interest is 7%, then the future value (FV) of an investment that pays $1200 per year and lasts 18 years is closest to ________.

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?

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 ________.

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

Which of the following is true about perpetuities?

A perpetuity will pay $1000 per 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 borrowing money to buy a car. If you can make payments of $320 per month starting one month from now at an interest rate of 12%, how much will you be able to borrow for the car today if you finance the amount over 4 years?

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%?

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?

Martin wants to provide money in his will for an annual bequest to whichever of his living relatives is oldest. That bequest will provide $4000 in the first year, and will grow by 7% per year, forever. If the interest rate is 9%, how much must Martin provide to fund this bequest?

You are given two choices of investments, Investment A and Investment B. Both investments have the same future cash flows. Investment A has a discount rate of 4%, and Investment B has a discount rate of 5%. Which of the following is true?

The present value (PV) of a stream of cash flows is just the sum of the present values of each individual cash flow.

An investment pays you $30,000 at the end of this year, and $15,000 at the end of each of the four following years. What is the present value (PV) of this investment, given that the interest rate is 5% per year?

A perpetuity will pay $900 per year, starting five years after the perpetuity is purchased. What is the present value (PV) of this perpetuity on the date that it is purchased, given that the interest rate is 11%?

Which of the following formulas is INCORRECT?

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

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

Filters