Question 1

Western Bank offers you a $21,000,9-year term loan at 8 percent annual interest.What is the amount of your annual loan payment?

Accepted Answer

A) $3,228.50 
B) $3,361.67 
C) $3,666.67 
D) $3,901.18 
E) $4,311.07

Question 2

A loan where the borrower receives money today and repays a single lump sum on a future date is called a(n)_____ loan.

Accepted Answer

A) amortized 
B) continuous 
C) balloon 
D) pure discount 
E) interest-only

Question 3

Meadow Brook Manor would like to buy some additional land and build a new assisted living center.The anticipated total cost is $20.5 million.The CEO of the firm is quite conservative and will only do this when the company has sufficient funds to pay cash for the entire construction project.Management has decided to save $1.2 million a quarter for this purpose.The firm earns 6.25 percent,compounded quarterly,on the funds it saves.How long does the company have to wait before expanding its operations?

Accepted Answer

A) 3.09 years 
B) 3.82 years 
C) 4.46 years 
D) 4.82 years 
E) 4.91 years

Question 4

Kingston Development Corp.purchased a piece of property for $2.79 million.The firm paid a down payment of 15 percent in cash and financed the balance.The loan terms require monthly payments for 15 years at an annual percentage rate of 7.75 percent,compounded monthly.What is the amount of each mortgage payment?

Accepted Answer

A) $22,322.35 
B) $23,419.97 
C) $23,607.11 
D) $24,878.15 
E) $25,301.16

Question 5

Your parents have made you two offers.The first offer includes annual gifts of $10,000,$11,000,and $12,000 at the end of each of the next three years,respectively.The other offer is the payment of one lump sum amount today.You are trying to decide which offer to accept given the fact that your discount rate is 8 percent.What is the minimum amount that you will accept today if you are to select the lump sum offer?

Accepted Answer

A) $28,216 
B) $29,407 
C) $29,367 
D) $30,439 
E) $30,691

Question 6

The preferred stock of Casco has a 6.25 percent dividend yield.The stock is currently priced at $59.30 per share.What is the amount of the annual dividend?

Accepted Answer

A) $3.30 
B) $3.35 
C) $3.40 
D) $3.71 
E) $3.90

Question 7

You just signed a consulting contract that will pay you $38,000,$52,000,and $85,000 annually at the end of the next three years,respectively.What is the present value of these cash flows given a 10.5 percent discount rate?

Accepted Answer

A) $139,975 
B) $148,307 
C) $154,880 
D) $157,131 
E) $162,910

Question 8

Which one of these statements related to growing annuities and perpetuities is correct?

Accepted Answer

A) The cash flow used in the growing annuity formula is the initial cash flow at time zero. 
B) Growth rates cannot be applied to perpetuities if you wish to compute the present value. 
C) The future value of an annuity will decrease if the growth rate is increased. 
D) An increase in the rate of growth will decrease the present value of an annuity. 
E) The present value of a growing perpetuity will decrease if the discount rate is increased.

Question 9

Gene's Art Gallery is notoriously known as a slow-payer.The firm currently needs to borrow $27,500 and only one company will even deal with them.The terms of the loan call for daily payments of $100.The first payment is due today.The interest rate is 24 percent,compounded daily.What is the time period of this loan? Assume a 365 day year.

Accepted Answer

A) 264.36 days 
B) 280.81 days 
C) 303.22 days 
D) 316.46 days 
E) 341.09 days

Question 10

Your father helped you start saving $20 a month beginning on your 5th birthday.He always made you deposit the money into your savings account on the first day of each month just to "start the month out right." Today completes your 17th year of saving and you now have $6,528.91 in this account.What is the rate of return on your savings?

Accepted Answer

A) 5.15 percent 
B) 5.30 percent 
C) 5.47 percent 
D) 5.98 percent 
E) 6.12 percent

Question 11

What is the effective annual rate of 14.9 percent compounded continuously?

Accepted Answer

A) 15.59 percent 
B) 15.62 percent 
C) 15.69 percent 
D) 15.84 percent 
E) 16.07 percent

Question 12

You are comparing two annuities with equal present values.The applicable discount rate is 8.75 percent.One annuity pays $5,000 on the first day of each year for 20 years.How much does the second annuity pay each year for 20 years if it pays at the end of each year?

Accepted Answer

A) $5,211 
B) $5,267 
C) $5,309 
D) $5,390 
E) $5,438

Question 13

Your holiday ski vacation was great,but it unfortunately ran a bit over budget.All is not lost.You just received an offer in the mail to transfer your $5,000 balance from your current credit card,which charges an annual rate of 18.7 percent,to a new credit card charging a rate of 9.4 percent.You plan to make payments of $510 a month on this debt.How many less payments will you have to make to pay off this debt if you transfer the balance to the new card?

Accepted Answer

A) 0.36 payments 
B) 0.48 payments 
C) 1.10 payments 
D) 1.23 payments 
E) 2.49 payments

Question 14

Which one of the following accurately defines a perpetuity?

Accepted Answer

A) a limited number of equal payments paid in even time increments 
B) payments of equal amounts that are paid irregularly but indefinitely 
C) varying amounts that are paid at even intervals forever 
D) unending equal payments paid at equal time intervals 
E) unending equal payments paid at either equal or unequal time intervals

Question 15

John's Auto Repair just took out a $52,000,10-year,8 percent,interest-only loan from the bank.Payments are made annually.What is the amount of the loan payment in year 10?

Accepted Answer

A) $7,120 
B) $8,850 
C) $13,264 
D) $49,000 
E) $56,160

Question 16

You are preparing to make monthly payments of $72,beginning at the end of this month,into an account that pays 6 percent interest compounded monthly.How many payments will you have made when your account balance reaches $9,312?

Accepted Answer

A) 97 
B) 100 
C) 119 
D) 124 
E) 131

Question 17

The Wine Press is considering a project which has an initial cash requirement of $187,400.The project will yield cash flows of $2,832 monthly for 84 months.What is the rate of return on this project?

Accepted Answer

A) 6.97 percent 
B) 7.04 percent 
C) 7.28 percent 
D) 7.41 percent 
E) 7.56 percent

Question 18

Beginning three months from now,you want to be able to withdraw $1,700 each quarter from your bank account to cover college expenses over the next 4 years.The account pays 1.25 percent interest per quarter.How much do you need to have in your account today to meet your expense needs over the next 4 years?

Accepted Answer

A) $24,514.50 
B) $24,847.15 
C) $25,068.00 
D) $25,454.09 
E) $25,711.18

Question 19

The Pawn Shop loans money at an annual rate of 23 percent and compounds interest weekly.What is the actual rate being charged on these loans?

Accepted Answer

A) 25.16 percent 
B) 25.80 percent 
C) 26.49 percent 
D) 26.56 percent 
E) 26.64 percent

Question 20

What is the future value of $12,000 a year for 25 years at 12 percent interest?

Accepted Answer

A) $878,406 
B) $1,600,006 
C) $1,711,414 
D) $1,989,476 
E) $2,021,223

Exam 6: Discounted Cash Flow Valuation