Question 1

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 2

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 3

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 4

If the current rate of interest is 8%, then the present value (PV) of an investment that pays $1200 per year and lasts 24 years is closest to ________.

Accepted Answer

A)  $7581 
B)  $15,162 
C)  $12,635 
D)  $17,689 
A)  $7581 
B)  $15,162 
C)  $12,635 
D)  $17,689

Question 5

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 6

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

Accepted Answer

A) True 
 B)False

Question 7

Suppose that a young couple has just had their first baby and they wish to insure that enough money will be available to pay for their child's college education. They decide to make deposits into an educational savings account on each of their daughter's birthdays, starting with her first birthday. Assume that the educational savings account will return a constant 9%. The parents deposit $2400 on their daughter's first birthday and plan to increase the size of their deposits by 7% each year. Assuming that the parents have already made the deposit for their daughter's 18th birthday, then the amount available for the daughter's college expenses on her 18th birthday is closest to ________.

Accepted Answer

A)  $80,232 
B)  $160,463 
C)  $112,324 
D)  $176,509 
A)  $80,232 
B)  $160,463 
C)  $112,324 
D)  $176,509

Question 8

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 9

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 10

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 11

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 12

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 13

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 14

Which of the following statements regarding annuities is FALSE?

Accepted Answer

A)  PV of an annuity = C ×  
  
B)  The difference between an annuity and a perpetuity is that a perpetuity ends after some fixed number of payments. 
C)  An annuity is a stream of N equal cash flows paid at regular intervals. 
D)  Most car loans, mortgages, and some bonds are annuities. 
A)  PV of an annuity = C ×  
  
B)  The difference between an annuity and a perpetuity is that a perpetuity ends after some fixed number of payments. 
C)  An annuity is a stream of N equal cash flows paid at regular intervals. 
D)  Most car loans, mortgages, and some bonds are annuities.

Question 15

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 16

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

Question 17

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 18

Salvatore has the opportunity to invest in a scheme which will pay $5000 at the end of each of the next 5 years. He must invest $10,000 at the start of the first year and an additional $10,000 at the end of the first year. What is the present value of this investment if the interest rate is 3%?

Accepted Answer

A)  -$3189.80 
B)  -$5907.57 
C)  5907.57 
D)  $3189.80 
A)  -$3189.80 
B)  -$5907.57 
C)  5907.57 
D)  $3189.80

Question 19

Consider the following timeline detailing a stream of cash flows:   If the current market rate of interest is 10%, then the present value (PV) of this stream of cash flows is closest to ________.

Accepted Answer

A)  $10,114 
B)  $20,227 
C)  $24,272 
D)  $32,363 
A)  $10,114 
B)  $20,227 
C)  $24,272 
D)  $32,363

Question 20

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

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

Which of the following is true about perpetuities?

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 ________.

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 ________.

If the current rate of interest is 8%, then the present value (PV) of an investment that pays $1200 per year and lasts 24 years is closest to ________.

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

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?

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%?

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 ________.

Which of the following statements regarding annuities is FALSE?

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?

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?

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?

Salvatore has the opportunity to invest in a scheme which will pay $5000 at the end of each of the next 5 years. He must invest $10,000 at the start of the first year and an additional $10,000 at the end of the first year. What is the present value of this investment if the interest rate is 3%?

Consider the following timeline detailing a stream of cash flows: If the current market rate of interest is 10%, then the present value (PV) of this stream of cash flows is closest to ________.

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%?

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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