Chapter 6 Test Bank
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Chapter 6 Test Bank

Course Number: FIN 3716, Spring 2011

College/University: LSU

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CHAPTER 5 Discounted Cash Flow Valuation I. DEFINITIONS Topic: ANNUITY 1. An annuity stream of cash flow payments is: A) A set of level cash flows occurring each time period for a fixed length of time. B) A set of level cash flows occurring each time period forever. C) A set of increasing cash flows occurring each time period for a fixed length of time. D) A set of increasing cash flows occurring each time period...

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5 CHAPTER Discounted Cash Flow Valuation I. DEFINITIONS Topic: ANNUITY 1. An annuity stream of cash flow payments is: A) A set of level cash flows occurring each time period for a fixed length of time. B) A set of level cash flows occurring each time period forever. C) A set of increasing cash flows occurring each time period for a fixed length of time. D) A set of increasing cash flows occurring each time period forever. E) A set of arbitrary cash flows occurring each time period for no more than 10 years. Register to View Answer Topic: PRESENT VALUE FACTOR FOR ANNUITIES 2. The present value factor for annuities is calculated as: A) (1 + present value factor)/r B) (1 present value factor)/r C) Present value factor + (1/r) D) (Present value factor*r) + (1/r) Register to View Answer Topic: FUTURE VALUE FACTOR FOR ANNUITIES 3. The future value factor for annuities is calculated as: A) Future value factor + r B) (1/r) + (future value factor*r) C) (1/r) + future value factor D) (Future value factor 1)/r E) (Future value factor + 1)/r Register to View Answer Topic: ANNUITIES DUE 4. Annuities where the payments occur at the end of each time period are called ___________, whereas __________ refer to annuity streams with payments occuring at the beginning of each time period. A) ordinary annuities; early annuities B) late annuities; straight annuities C) straight annuities; late annuities D) annuities due; ordinary annuities E) ordinary annuities; annuities due Register to View Answer Topic: PERPETUITY 5. An annuity stream where the payments occur forever is called a(n) ____________. A) annuity due B) indemnity C) perpetuity D) amortized cash flow stream E) amortization table Register to View Answer Topic: STATED INTEREST RATES 6. The interest rate expressed in terms of the interest payment made each period is called the: A) Stated interest rate. B) Compound interest rate. C) Effective annual rate. D) Periodic interest rate. E) Daily interest rate. Register to View Answer Topic: EFFECTIVE ANNUAL RATE 7. The interest rate expressed as if it were compounded once per year is called the: A) Stated interest rate. B) Compound interest rate. C) Effective annual rate. D) Periodic interest rate. E) Daily interest rate. Register to View Answer Topic: ANNUAL PERCENTAGE RATE 8. The interest rate charged per period multiplied by the number of periods per year is called the: A) Effective annual rate (EAR). B) Annual percentage rate (APR). C) Periodic interest rate. D) Compound interest rate. E) Daily interest rate. Register to View Answer Topic: PURE DISCOUNT LOAN 9. A loan where the borrower receives money today and repays a single lump sum at some time in the future is called a(n) _____________ loan. A) amortized B) continuous C) balloon D) pure discount E) Register to View Answer interest-only Topic: INTEREST-ONLY LOAN 10. A loan where the borrower pays interest each period and repays the entire principal of the loan at some point in the future is called a(n) _________ loan. A) amortized B) continuous C) balloon D) pure discount E) interest-only Register to View Answer Topic: AMORTIZED LOAN 11. A loan where the borrower pays interest each period, and repays some or all of the principal of the loan over time is called a(n) _________ loan. A) amortized B) continuous C) balloon D) pure discount E) interest-only Register to View Answer Topic: BALLOON LOAN 12. A loan where the borrower pays interest each period, repays part of the principal of the loan over time, and repays the remainder of the principal at the end of the loan, is called a(n) _______________ loan. A) amortized B) continuous C) balloon D) pure discount E) interest-only Register to View Answer II CONCEPTS Topic: EFFECTIVE ANNUAL RATE 13. You are trying to compare the desirability of two alternative investments with rates of return quoted using different compounding periods. To make the proper decision, you should: A) Convert each quoted return to an effective annual rate. B) Convert each quoted return to an annual nominal rate. C) Convert each quoted return to a monthly nominal rate. D) Compare the investments by using the quoted returns. E) Convert each quoted return to an APR. Register to View Answer Topic: ANNUAL PERCENTAGE RATE 14. Which of the following statements is FALSE? A) When comparing investments it is best not to rely solely on quoted rates. B) Compounding typically leads to differences between quoted and effective rates. C) The APR on a loan with monthly payments is less than the annual interest you actually pay. D) The APR is the interest rate per period multiplied by the number of periods per year. E) With monthly compounding, the APR will be larger than the effective annual rate. Register to View Answer Topic: PERPETUITY 15. Which of the following CANNOT be calculated? A) The present value of a perpetuity. B) The interest rate on a perpetuity given the present value and payment amount. C) The present value of an annuity due. D) The future value of an annuity due. E) The future value of a perpetuity. Register to View Answer Topic: PRESENT VALUE PERPETUITY 16. You are considering two perpetuities which are identical in every way, except that perpetuity A will begin making annual payments of $P to you two years from today while the first $P payment for perpetuity B will occur one year from today. It must be true that the present value of perpetuity: A) A is greater than that of B by $P. B) B is greater than that of A by $P. C) B is equal to that of perpetuity A. D) A exceeds that of B by the PV of $P for one year. E) B exceeds that of A by the PV of $P for one year. Register to View Answer Topic: COMPARING SAVINGS ACCOUNTS 17. You have $800 that you would like to invest. You have 2 choices: Savings account A which earns 8% compounded annually, or savings account B which earns 7.90% compounded semiannually. Which would you choose and why? A) A because it has a higher effective annual rate. B) A because it has the higher quoted rate. C) B because it has a higher effective annual rate. D) B because the future value in one year is lower. E) B because it has the higher quoted rate. Register to View Answer Topic: COMPARING SAVINGS ACCOUNTS 18. You have $800 that you would like to invest. You have 2 choices: Savings account A which earns 8% compounded annually, or savings account B which earns 7.70% compounded monthly. Which would you choose and why? A) A because it has a higher effective annual rate. B) A because the future value in one year is lower. C) B because it has a higher effective annual rate. D) B because the future value in one year is lower. E) A because it has the higher quoted rate. Register to View Answer Topic: COMPARING SAVINGS ACCOUNTS 19. You are planning to save your Christmas bonuses from work and are comparing savings accounts: Account A compounds semiannually while account B compounds monthly. If both accounts have the same quoted annual rate of interest and you place only the bonuses in the account, you should choose _______________. A) account A because it has a higher APR B) account B because it has a higher APR C) account B because it is compounded more often D) account A because you will pay less in taxes E) either account, since both quote the same rate of interest Register to View Answer Topic: INTERPRETING INTEREST RATES 20. Which of the following statements is true? A) Present values and discount rates move in the same direction with one another. B) On loans with monthly compounding, the APR will exceed the EAR. C) Compounding essentially means earning interest on interest. D) Future values decrease with increases in interest rates. E) All else the same, the longer the term of a loan the lower will be the total interest you pay on it. Register to View Answer Topic: COMPARING LOANS 21. You want to borrow money to buy a new car, and you are trying to decide whether to borrow short-term (24 months) or long-term (60 months). Which of the following would be IRRELEVANT to your borrowing decision? A) The EARs on the two alternative loans. B) The APRs on the two alternative loans. C) The interest you could earn by investing the difference between the two loan payments. D) The fact that you must make 48 more payments on the longer term loan. E) The amount of money to be borrowed. Register to View Answer Topic: PRESENT VALUE ANNUITY 22. You are going to invest $500 at the end of each year for ten years. Given an interest rate, you can find the present value of this investment by: I. Adding the cash flows together and finding the present value of the sum using the appropriate present value factor. II. Applying the proper present value factor to each cash flow, then adding up these present values. III. Finding the future value of each cash flow, adding all of the future values together, then finding the discounted present value of this future value sum. IV. Finding the future value of the entire payment stream. A) B) C) D) E) Register to View AnswerII only III only II and III only I, II, and IV only II, III, and IV only Topic: ANNUITIES DUE 23. You are evaluating two annuities. They are identical in every way, except that one is an ordinary annuity and one is an annuity due. Which of the following is FALSE? A) The ordinary annuity must have a lower present value than the annuity due. B) The ordinary annuity must have a lower future value than the annuity due. C) The annuity due must have the same present value as the ordinary annuity. D) The two annuities will differ in present value by the amount (1+r). E) The annuity due and the ordinary annuity will make the same number of total payments over time. Register to View Answer III. PROBLEMS Topic: PRESENT VALUE UNEVEN CASH FLOWS 24. What is the total present value of $80 received in one year, $300 received in two years, and $700 received in six years if the discount rate is 7%? A) $582.72 B) $681.68 C) $757.25 D) $803.24 E) $852.83 Register to View Answer2 6 Response: PV = $80 / 1.07 + 300 / 1.07 + 700 / 1.07 = $803.24 Topic: FUTURE VALUE UNEVEN CASH FLOWS 25. What is the total future value six years from now of $80 received in one year, $300 received in two years, and $700 received in six years if the discount rate is 7%? A) $1,080.00 B) $1,047.15 C) $1,205.44 D) $1,254.44 E) $1,299.15 Register to View Answer5 4 Response: FV = $80 (1.07) + 300 (1.07) + 700 = $1,205.44 Topic: PRESENT VALUE UNEVEN CASH FLOWS 26. Given the following cash flows, what is the present value if the discount rate is 8%? A) B) C) D) E) Register to View Answer$2,714.09 $1,415.07 $2,714.09 $2,865.70 $3,058.96 $3,222.62 Response: PV = $400 / 1.08 + 250 / 1.082 + 900 / 1.083 + 1,925 / 1.084 = Topic: PRESENT VALUE UNEVEN CASH FLOWS 27. What is the present value of the following set of cash flows at an 10% discount rate? A) B) C) D) E) Register to View Answer $ 0.00 $ 120.76 $ 173.31 $ 379.41 $3,312.13 2 3 4 Response: PV = $800 / 1.1 - 800 / 1.1 + 800 / 1.1 - 800 / 1.1 = $120.76 Topic: FUTURE VALUE UNEVEN CASH FLOWS 28. What is the future value at the end of year 4 of the following set of cash flows? Assume an interest rate of 10%. A) B) C) D) E) Register to View Answer $ 0.00 $ 127.38 $ 176.80 $ 379.41 $3,312.13 3 2 Response: FV = $800 (1.1) - 800 (1.1) + 800 (1.1) - 800 = $176.80 Topic: FUTURE VALUE UNEVEN CASH FLOWS 29. What is the future value of the following set of cash flows 4 years from now? Assume an interest rate of 6.5%. A) B) C) D) E) Register to View Answer $ 555.18 $ 785.72 $ 942.12 $1,068.39 $1,100.00 4 3 2 Response: FV = -$700(1.065) + 300 (1.065) + 600 (1.065) + 400 (1.065) + 500 = $1,068.39 Topic: INTEREST RATE 30. Given the following cash flows, what is the implicit discount rate if the present value is $2,450? Year 1 2 3 Cash Flow $700 $950 $1400 A) B) C) D) E) 5.45% 8.72% 10.48% 12.89% 15.91% Register to View Answer2 3 Response: $2,450 = $700 / (1 + r) + 950 / (1 + r) + 1,400 / (1 + r) ; r = 10.48% Topic: INTEREST RATE 31. Given the following cash flows, what is the interest rate if the future value at the end of year 3 is equal to $3,218? A) B) C) D) E) Register to View Answer4% 5% 6% 7% 8% 2 Response: $3,218 = $700 (1 + r) + 950 (1 + r) + 1,400; r = 7.0% Topic: ANNUITY PAYMENT 32. You need to borrow $23,000 to buy a truck. The current loan rate is 7.9% compounded monthly and you want to pay the loan off in equal monthly payments over 5 years. What is the size of your monthly payment? A) $323.39 B) $374.04 C) $465.26 D) $494.69 E) $555.66 Register to View Answer60 Response: $23,000 = C [1 -(1 / 1.00658 )] / .00658; C = $465.26 Topic: PRESENT VALUE ANNUITY 33. The monthly mortgage payment on your house is $821.69. It is a 30 year mortgage at 6.5% compounded monthly. How much did you borrow? A) $ 85,000 B) $100,000 C) $115,000 D) $130,000 E) $140,000 Register to View Answer360 Response: PVA = $821.69 [1 -(1 / 1.0054 ] / .0054 = $130,000 Topic: PRESENT VALUE PERPETUITY 34. You just won the lottery. You and your heirs will receive $40,000 per year forever, beginning one year from now. What is the present value of your winnings at an 10% discount rate? A) $ 44,000 B) $300,000 C) $387,500 D) $400,000 E) $437,500 Register to View AnswerResponse: PVP = $40,000 / .10 = $400,000 Topic: PERPETUITY INTEREST RATE 35. You just won the lottery. You and your heirs will receive $40,000 per year forever, beginning one year from now. If the present value of the lottery is $500,000, what is the discount rate used to value this perpetuity? A) 6% B) 7% C) 8% D) 9% E) 10% Register to View AnswerResponse: $500,000 = $40,000 / r; r = 8% Topic: PRESENT VALUE PERPETUITY DUE 36. You just won the lottery. You and your heirs will receive $40,000 per year forever, with the first payment received immediately. What is the present value at a 9% discount rate? A) $182,500 B) $375,222 C) $400,000 D) $444,444 E) $484,444 Register to View AnswerResponse: PV = $40,000 + $40,000 / .09 = $484,444 Topic: EFFECTIVE ANNUAL RATE 37. What is the effective annual rate of 6% compounded quarterly? A) 5.37% B) 6.00% C) 6.14% D) 7.50% E) 24.00% Register to View Answer4 Response: EAR = [1 + (.06/4)] -1 = 6.14% Topic: EFFECTIVE ANNUAL RATE 38. What is the effective annual rate of 11% compounded semiannually? A) 11.00% B) 11.15% C) 11.30% D) 11.84% E) 12.16% Register to View Answer2 Response: EAR = [1 + (.11/2)] -1 = 11.30% Topic: EFFECTIVE ANNUAL RATE 39. What is the effective annual rate of 10% compounded monthly? A) 9.27% B) 10.00% C) 10.25% D) 10.38% E) 10.47% Register to View Answer12 Response: EAR = [1 + (.10/12)] -1 = 10.47% Topic: EFFECTIVE ANNUAL RATE COMPOUNDING 40. A given rate is quoted as 12% APR, but has an EAR of 12.55%. What is the rate of compounding during the year? A) Annually B) Semiannually C) Quarterly D) Monthly E) Daily Register to View Answerm Response: .1255 = [1 + (1 + .12/m)] -1; m = 4 or quarterly Topic: FUTURE VALUE ANNUITY DUE 41. What is the future value in 12 years of $800 payments received at the beginning of each year for the next 12 years? Assume an interest rate of 8.25%. A) $14,259.63 B) $15,408.65 C) $16,679.86 D) $18,495.48 E) $20,782.15 Register to View Answer12 Response: FVA = $800 [(1.0825 -1) / .0825] (1.0825) = $16,679.86 due Topic: PRESENT VALUE ANNUITY DUE 42. What is the present value of $1,500 payments received at the beginning of each year for the next 10 years? Assume an interest rate of 6.525%. A) $ 978.75 B) $ 7,093.62 C) $10,770.64 D) $11,473.43 E) $15,000.00 Register to View Answer10 Response: PVA = $1,500 {[1- (1 / 1.06525 )] / .06525} ( 1.06525) = due $11,473.43 Topic: LOAN PAYMENTS 43. Fast Eddie's Used Cars will sell you a 1989 Mazda Miata for $5,000 with no money down. You agree to make weekly payments for 2 years, beginning one week after you buy the car. The stated rate on the loan is 13%. How much is each payment? A) $42.96 B) $54.66 C) $68.19 D) $75.90 E) $99.65 Register to View Answer104 Response: $5,000 = C {[1 - (1 / 1.0025 )] / .0025}; C = $54.66 Topic: PRESENT VALUE ANNUITY 44. You win the lottery and are given the option of receiving $250,000 now or an annuity of $25,000 at the end of each year for 30 years. Which of the following is correct? (Ignore taxes) A) You cannot choose between the two without first calculating future values. B) You will always choose the lump regardless of interest rates. C) You will choose the annuity payment if the interest rate is 7%. D) You will always choose the annuity. E) Comparing the future value of the two alternatives will lead to a different decision than you will reach from a comparison of the present values. Register to View Answer30 Response: PVA = $25,000 {[1 - (1 / 1.07 )] / .07} = $310,226; choose annuity Topic: PRESENT VALUE ANNUITY 45. You are going to withdraw $5,000 at the end of each year for the next four years from an account that pays interest at a rate of 9% compounded annually. How much must there be in the account today in order for the account to reduce to a balance of zero after the last withdrawal? A) $14,793.83 B) $16,198.60 C) $18,602.29 D) $19,713.75 E) $20,000.00 Register to View Answer4 Response: PVA = $5,000 {[1 - (1 / 1.09 )] / .09} = $16,198.60 Topic: PRESENT VALUE ANNUITY 46. You are going to withdraw $5,000 at the end of each year for the next four years from an account that pays interest at a rate of 9% compounded annually. The account balance will reduce to zero when the last withdrawal is made. How much money will be in the account immediately after the third withdrawal is made? A) $ 4,587.16 B) $ 4,977.10 C) $ 5,000.00 D) $ 6,982.29 E) $10,000.00 Register to View AnswerResponse: PV = $5,000 / 1.09 = $4,587.16 Topic: ANNUITY INTEREST 47. You are going to withdraw $5,000 at the end of each year for the next four years from an account that pays interest at a rate of 9% compounded annually. The account balance will reduce to zero when the last withdrawal is made. How much interest will you earn on the account over the four year life? A) $ 0.00 B) $2,409.60 C) $3,801.40 D) $4,000.00 E) $5,711.20 Register to View AnswerResponse: 4 PVA = $5,000 {[1 - (1 / 1.09 )] / .09} = $16,198.60; interest = $20,000 - 16,198.60 = $3,801.40 Topic: PRESENT VALUE ANNUITY 48. At the end of each year for the next 8 years you will receive cash flows of $500. If the appropriate discount rate is 7.5%, how much would you pay for this annuity? A) $4,000.00 B) $5,841.22 C) $1,259.47 D) $2,928.65 E) $3,148.30 Register to View Answer8 Response: PVA = $500 {[1 - (1 / 1.075 )] / .075} = $2,928.65 Topic: RETURN ON ANNUITY 49. At the end of each year for the next 8 years you will receive cash flows of $500. The initial investment is $2,500. What rate of return are you expecting from this investment? A) 11.81% B) 10.27% C) 9.01% D) 8.28% E) 7.21% Register to View Answer8 Response: $2,500 = $500 {[1 - 1 / (1 + r) ] / r}; r = 11.81% Topic: ANNUITY PAYMENT 50. You are considering investing $400 in a 12-year annuity. The rate of return you require is 9%. What annual cash flow from the annuity will provide the required return? A) $ 10.77 B) $ 42.96 C) $ 55.86 D) $ 78.31 E) $129.27 Register to View Answer12 Response: $400 = C {[1 - (1 / 1.09 )] / .09}; C = $55.86 Topic: EFFECTIVE ANNUAL RATE 51. You are considering an investment with a quoted return of 10% per year. If interest is compounded daily, what is the effective return on this investment? A) 1.11% B) 10.00% C) 10.25% D) 10.47% E) 10.52% Register to View Answer365 Response: EAR = [1 + (.10 / 365)] -1 = 10.52% Topic: NUMBER OF PERIODS 52. You borrowed $1,200 at 8% compounded annually. Your payments are $96 at the end of each year. How many years will you make payments on the loan? A) 9 years B) 10 years C) 11 years D) 12 years E) forever Register to View AnswerResponse: annual interest = $1,200 x .08 = $96; you are only making interest payments and will never repay the principal Topic: APR/EAR 53. You agree to loan your parents $32,000 to buy a new van. They agree to pay you $650 a month for 5 years. The ________________. A) interest rate on the loan is 0.75% per month B) APR on the loan is 7.87% C) EAR on the loan is 8.08% D) APR on the loan is 8.22% E) EAR on the loan is 8.38% Register to View Answer60 Response: $32,000 = $650 {[1 - 1 / (1 + r) ] / r}; r = .6730%; EAR = (1 + . 12 006730) - 1 = 8.38% Topic: PRESENT VALUE ANNUITY 54. Your brother-in-law borrowed $3,000 from you 5 years ago and then disappeared. Yesterday he returned and expressed a desire to pay back the loan, including the interest accrued. Assuming that you had agreed to charge him 12%, and assuming that he wishes to make 5 equal annual payments beginning in one year, how much would your brother-in-law have to pay you annually in order to pay off the debt? (Assume that the loan continues to accrue interest at 12% per year.) A) $ 941.89 B) $1,200.00 C) $1,322.33 D) $1,466.67 E) $3,002.56 Register to View AnswerResponse: 5 FV = $3,000 (1.12) = $5,287.03 is the amount you are currently owed 5 PVA = $5,287.03 = C {[1 - (1 / 1.12 )] / .12}; C = $1,466.67 Topic: PRESENT VALUE ANNUITY 55. A "Name That Tune" contest has a grand prize of $500,000. However, the contest stipulates that the winner will receive just $200,000 immediately, and $30,000 at the end of each of the next 10 years. Assuming that one can earn 8% on their money, how much has the contest winner actually won? A) $250,000.00 B) $309,225.11 C) $365,826.02 D) $401,302.44 E) $500,000.00 Register to View Answer10 Response: PV = $200,000 + 30,000 {[1 - (1 / 1.08 )] / .08} = $401,302.44 Topic: ANNUITY PAYMENT 56. Denzel wishes to save money to provide for his retirement. Beginning one month from now, he will begin depositing a fixed amount into a retirement savings account that will earn 10% compounded monthly. He will make 420 such deposits. Then, one year after making his final deposit, he will withdraw $75,000 annually for 20 years. The fund will continue to earn 10% compounded monthly. How much should the monthly deposits be for his retirement plan? A) $119.11 B) $149.58 C) $162.92 D) $184.89 E) $209.38 Register to View AnswerResponse: 12 EAR = [1 + (.10 / 12)] -1 = 10.47% 20 PVA = $75,000 {[1 - (1 / 1.1047 )] / .1047} = $618,557.45 420 FVA = $618,557.45 = C [(1.0083 1) / .0083]; C = $162.92 Topic: COMPARING RATES 57. You have $100,000 to invest. Your bank offers one-year certificates of deposit with a stated rate of 3.50% compounded quarterly. What rate compounded semiannually would provide you with the same amount of money at the end of one year? A) 3.485% B) 3.500% C) 3.505% D) 3.510% E) 3.515% Register to View AnswerResponse: 4 2 EAR = [1 + (.035 / 4)] -1 = 3.5462%; EAR = .035462 = [1 + (r / 2)] -1; r = 3.5153% Topic: ANNUAL PERCENTAGE RATE 58. Vito Corleone will loan you money on a "four-for-five" arrangement; i.e., for every $4 he gives you today, you give him $5 one week from now. What is the APR of this loan? A) 250% B) 869% C) 1,000% D) 1,300% E) 1,800% Register to View AnswerResponse: $5 = $4 (1 + r); r = 25% per week; APR = 25% x 52 = 1,300% Topic: EFFECTIVE ANNUAL RATE 59. Vito Corleone will loan you money on a "four-for-five" arrangement; i.e., for every $4 he gives you today, you give him $5 one week from now. What is the EAR of this loan? A) 250% B) 869% C) 1,095% D) 109,475% E) 10,947,544% Register to View AnswerResponse: $5 = $4 (1 + r); r = 25% per week; APR = 25% x 52 = 1,300% 52 EAR = [1 + (13 / 52)] -1 = 10,947,544% Topic: PRESENT VALUE PERPETUITY 60. You own a bond issued by the Canadian Pacific railroad that promises to pay the holder $50 annually forever. You plan to sell the bond 10 years from now. If similar investments yield 7% at that time, how much will the bond be worth? A) $350.00 B) $592.17 C) $714.29 D) $825.00 E) $938.44 Register to View AnswerResponse: PVP = $50 / .07 = $714.29 Topic: COMPARING PRESENT VALUES 61. Moe purchases a $50, 30-year annuity. Larry purchases a $50 perpetuity. In both cases, payments begin in one year, and the appropriate interest rate is 12.5%. What is the present value of Larry's payments that will occur from year 31 onwards? A) $ 11.68 B) $ 68.11 C) $ 91.27 D) $124.40 E) More than $150 Register to View AnswerResponse: 30 PVP = $50 / .125 = $400; PVA = $50 {[1 - (1 / 1.125 )] / .125} = $388.32; difference = $11.68 Topic: COMPARING PRESENT VALUES 62. Moe purchases a $50 annual perpetuity for which payments begin in one year. Larry purchases a $50 annual perpetuity for which payments begin immediately. If a 12.5% interest rate is appropriate for both cash flow streams, which of the following statements is true? A) Moe's perpetuity is worth $50 more than Larry's. B) Larry's perpetuity is worth $50 more than Moe's. C) The perpetuities are of equal value today. D) Larry's perpetuity is worth $44.44 more than Moe's. E) Moe's perpetuity is worth $44.44 more than Larry's. Register to View AnswerResponse: Moe: PVP = $50 / .125 = $400; Larry: PV = $50 + 50 / .125 = $450 Topic: PRESENT VALUE ANNUITY DUE 63. In order to help you through college, your parents just deposited $20,000 into a bank account paying 6% interest. Starting tomorrow, you plan to withdraw equal amounts from the account at the beginning of each of the next four years. What is the MOST you can withdraw annually? A) $5,136.91 B) $5,445.12 $5,771.83 C) D) $6,101.88 E) $6,395.88 Register to View Answer4 Response: PVA = $20,000 = C {[1 - (1 / 1.06 )] / .06} (1.06); C = $5,445.12 due Topic: PRESENT VALUE ANNUITY 64. In order to help you through college, your parents just deposited $20,000 into a bank account paying 6% interest. Starting next year, you plan to withdraw equal amounts from the account at the end of each of the next four years. What is the MOST you can withdraw annually? A) $5,136.91 B) $5,445.12 C) $5,771.83 D) $6,101.88 E) $6,395.88 Register to View Answer4 Response: PVA = $20,000 = C {[1 - (1 / 1.06 )] / .06}; C = $5,771.83 Topic: PRESENT VALUE OF UNEVEN CASH FLOWS 65. Analysts expect Placer Corp. to pay shareholders $2.25 per share annually for the next five years. After that, the dividend will be $3.50 annually forever. Given a discount rate of 12%, what is the value of the stock today? A) $16.55 B) $19.87 C) $22.37 D) $24.66 E) $27.88 Register to View AnswerResponse: PVP = $3.50 / .12 = $29.17; PV = $29.17 / 1.125 = $16.55 5 PVA = $2.25 {[1 - (1 / 1.12 )] / .12} = $8.11; Price = $16.55 + 8.11 = $24.66 Topic: PERPETUITY RETURN 66. The preferred stock of Placer Corp. currently sells for $44.44 per share. The annual dividend of $4 is fixed. Assuming a constant dividend forever, what is the rate of return on this stock? A) 7.0% B) 8.0% C) 9.0% D) 10.0% E) 11.0% Register to View AnswerResponse: $44.44 = $4 / r; r = 9.0% Topic: EAR LOAN RATE 67. Fast Eddie's Used Cars will sell you a 1989 Mazda Miata for $5,000 with no money down. You agree to make weekly payments of $60.00 for 2 years, beginning one week after you buy the car. What is the EAR of this loan? A) 20.04% B) 22.85% C) 25.61% D) 32.34% E) 43.01% Register to View AnswerResponse: 104 $5,000 = $60 {[1 - 1 / (1 + r) ] / r}; r = .4394%; APR = .4394 x 52 = 22.85% 52 EAR = (1 + .004394) - 1 = 25.61% Topic: PRESENT VALUE ANNUITY DUE WITH EAR 68. What is the present value of $600 payments received at the beginning of each year for the next 10 years? Assume an interest rate of 8% compounded monthly. A) $3,069.13 B) $3,972.13 C) $4,026.05 D) $4,301.82 E) $4,955.26 Register to View AnswerResponse: 12 EAR = [1 + (.08/12)] -1 = 8.30% 10) PVA = $600 {[1 - (1 / 1.083 ] / .083} (1.083) = $4,301.82 due Topic: PRESENT VALUE PERPETUITY 69. Five years from now you will begin to receive cash flows of $125 per year. These cash flows will continue forever. If the discount rate is 10%, what is the present value of these cash flows? A) $ 776.15 B) $ 853.77 C) $ 934.07 D) $1,136.36 E) $1,250.00 Register to View Answer4 Response: PVP = $125 / .1 = $1,250; PV = $1,250 / (1.1) = $853.77 Topic: MULTIPLE RATES 70. Four years from now you will receive the first of seven annual $6,000 payments. The current interest rate is 8%, but by the beginning of year 4, the rate will rise to 10%. What is the present value of this cash flow stream? A) $18,770.49 B) $21,946.29 C) $23,617.66 D) $26,131.56 E) $32,131.56 Register to View AnswerResponse: 6 PV = $6,000 + 6,000 {[1 - (1 / 1.1 )] / .01} = $32,131.56 at t = 4 4 PV = $32,131.56 / 1.08 = $23,617.66 Topic: DISCOUNT LOANS 71. Your local bank just loaned you $2,000. This amount is net of a 12% discount on the loan proceeds, which serves as interest on the loan. You are to repay the loan in one year. What is the effective rate at which you borrowed? A) 12.00% B) 13.64% C) 14.48% D) 14.98% E) 15.34% Register to View AnswerResponse: gross loan = $2,000 / .88 = $2,272.73; interest = $272.73; r = $272.73 / 2,000 = 13.64% Topic: LOAN WITH POINTS 72. Your local S&L provides you with the following information concerning a possible single payment loan. You pay 2 "points" (1 point=1%) up front, and the interest rate you are charged is 8%. If you borrow $50,000 for one year on these terms, at what rate are you actually borrowing? A) 8.20% B) 8.71% C) 9.20% D) 10.20% E) 11.48% Register to View AnswerResponse: proceeds = $50,000 x .98 = $49,000; $49,000 = ($50,000 x 1.08) / (1 + r); r = 10.20% Topic: ANNUITIES 73. The company you work for will deposit $150 at the end of each month into your retirement fund. Interest is compounded monthly. You plan to retire 25 years from now and estimate that you will need $2,000 per month out of the account for the ensuing 20 years. If the account pays 10% compounded monthly, how much do you need to put into the account each month, in addition to your company's deposit, in order to meet your objective? A) $ 0.00; the company's deposit fully funds your retirements objective B) $105.42 C) $ 6.20 D) $ 21.96 E) $ 34.33 Register to View AnswerResponse: 240 need: $2,000 {[1 - 1 / (1 + .1 / 12) ] / (.1 / 12)} = $207,249.24 300 payment: $207,249.24 = C {[(1 + .1/12) - 1] / (.1/12)}; C = $156.20 difference = $156.20 - 150 = $6.20 Topic: ZERO INTEREST FINANCING 74. You work for a furniture store. You normally sell a living room set for $4,000 and finance the full purchase price for 24 monthly payments at 24% APR. You are planning to run a zero-interest financing sale during which you will finance the set over 24 months at 0% interest. How much do you need to charge for the bedroom set during the sale in order to earn your usual combined return on the sale and the financing? A) $4,000 B) $4,589 C) $5,076 D) $5,351 E) $6,240 Register to View Answer24 Response: $4,000 = C {[1 - (1 / 1.02 )] / .02}; C = $211.48; @0% price = $211.48 x 24 = $5,075.63 Topic: ZERO INTEREST FINANCING 75. You work for a furniture store. You normally sell a living room set for $4,000 and finance the full purchase price for 24 monthly payments at 24% APR. You are planning to run a zero-interest financing sale during which you will finance the set over 24 months at 0% interest. How much do you need to raise the price of the bedroom set during the sale in order to earn your usual combined return on the sale and the financing? A) $2,240 B) $1,076 C) $ 589 D) $1,351 E) $ 0 Register to View AnswerResponse: 24 $4,000 = C {[1 - (1 / 1.02 )] / .02}; C = $211.48; @0% price = $211.48 x 24 = $5,075.63 increase in price = $5,075.63 - 4,000 = $1,075.63 Topic: ZERO INTEREST FINANCING 76. You work for a furniture store. You normally sell a living room set for $4,000 and finance the full purchase price for 24 monthly payments at 24% APR. You are planning to run a zero-interest financing sale during which you will finance the set over 24 months at 0% interest. What is the monthly payment on a zero-interest loan that you must charge during the sale in order to earn your usual combined return on the sale and the financing? A) $166.67 B) $181.93 C) $200.00 D) $211.48 E) $245.22 Register to View Answer24 Response: $4,000 = C {[1 - (1 / 1.02 )] / .02}; C = $211.48 Topic: FUTURE VALUE UNEVEN CASH FLOWS 77. You deposit $600 in an account today. You will deposit $500 at the end of each month for the next 12 months and $400 each month for the following 12 months. How much interest will you have earned in 2 years if the account pays 7.5% compounded monthly? A) $795.42 B) $827.65 C) $849.42 D) $958.02 E) $999.30 Register to View AnswerResponse: 24 24 FV = $600 (1 + .075/12) + 500 {[(1 + .075/12) - 1] / (.075/12)} 12 100 {[(1 + .075/12) - 1) / (.075/12)} = $12,358.02 no interest: $600 + 12 (500) + 12 (400) = $11,400; interest = $12,358.02 - 11,400 = $958.02 Topic: COMPARING LOANS 78. You are planning to borrow $4,000. You can repay the loan in 40 monthly payments of $118.00 each or 36 monthly payments of $129.07 each. You decide to take the 40 month loan. During each of the first 36 months you make the loan payment and place the difference between the two payments ($11.07) into an investment account earning 10% APR. Beginning with the 37th payment you will withdraw money from the investment account to make your payments. How much money will remain in the investment account after your loan is repaid? A) $ 11.07 B) $ 0.19 C) $ 25.25 D) $ 59.78 E) $462.52 Register to View AnswerResponse: 36 savings in 36 months: FVA = $11.07 {[(1 + .1/12) - 1] / (.1/12)} = $462.52 4 remaining payments: PVA = $118 {[1 - (1 / 1+(.1/12) )] / (.1/12)} = $462.33 Since the balance is essentially the same with 4 years left, the savings account will be worth approximately $0 in 4 years ($0.19) Topic: NUMBER OF PERIODS 79. You have $4,000 in a savings account which earns 8% compounded monthly and $4,500 in an account which earns 6% compounded monthly. How many years will it be until the two accounts have the same balance if you do not withdraw any money? A) 3 years B) 4 years C) 5 years D) 6 years E) 7 years Register to View Answer Response: t $4,000 (1 + .08/12) = $4,500 (1 + .06/12)t; t = ln 1.125 / ln 1.0017 = 71.08 months = 5.92 years Topic: MISMATCHED COMPOUNDING PERIODS 80. If you deposit $1,000 at the end of each six months into an account which earns 8.5% interest compounded quarterly, how much will be in the account in 6 years? A) $12,000.00 B) $13,394.64 C) $14,057.45 D) $15,282.59 E) $17,366.18 Register to View AnswerResponse: 2 semiannual effective rate = [1 + (.085/4)] - 1 = 4.295% 12 FVA = $1,000 {[(1 + .04295) - 1] / .04295} = $15,282.59 Topic: MISMATCHED COMPOUNDING PERIODS 81. What would your payment be on a 30-year, $250,000 loan at 10% interest compounded semiannually assuming the payments are made annually? A) $ 2,240.25 B) $10,743.77 C) $22,402.50 D) $27,074.44 E) $35,348.16 Register to View AnswerResponse: 2 EAR = [1 + (.10/2)] -1 = 10.25% 30 PVA = $250,000 = C {[1 - (1 / 1.1025 )] / .1025} = $27,074.44 Topic: FUTURE VALUE OF UNEVEN CASH FLOWS 82. When you were born, your dear old Aunt Minnie promised to deposit $500 into a savings account bearing a 5% compounded annual rate on each birthday, beginning with your first. You have just turned 21 and want the dough. However, it turns out that dear old (forgetful) Aunt Minnie made no deposits on your fifth and eleventh birthdays. How much is in the account right now? A) $10,500.00 B) $15,953.74 C) $16,768.19 D) $17,859.63 E) $21,000.00 Register to View Answer21 16 10 Response: FV = $500 {[(1 + .05) - 1] / .05} - 500 (1.05) - 500 (1.05) = $15,953.74 Use the following to answer questions 83-86: You and your spouse have found your dream home. The selling price is $220,000; you will put $50,000 down and obtain a 30-year fixed-rate mortgage at 7.5% APR for the balance. Topic: CALCULATING PAYMENTS 83. Assume that monthly payments begin in one month. What will each payment be? A) $ 901.52 B) $1,188.66 C) $1,359.74 D) $1,563.01 E) $1,722.80 Register to View Answer360 Response: PVA = $170,000 = C {[1 - 1 / (1 + .075/12) ] / (.075/12)}; C = $1,188.66 Topic: CALCULATING INTEREST COSTS 84. How much interest will you pay (in dollars) over the lifetime of the loan? (Assume you make each of the required 360 payments on time.) A) $235,101 B) $245,583 C) $257,919 D) $290,457 E) $370,457 Register to View AnswerResponse: 360 PVA = $170,000 = C {[1 - 1 / (1 + .075/12) ] / (.075/12)}; C = $1,188.66 total payments = $1,188.66 x 360 = $427,919; interest = $427,919 - 170,000 = $257,919 Topic: CALCULATING PAYMENTS 85. Although you will get a 30-year mortgage, you plan to prepay the loan by making an additional payment each month along with your regular payment. How much extra must you pay each month if you wish to pay off the loan in 20 years? A) $ 90.56 B) $154.88 C) $180.85 D) $203.28 E) $226.86 Register to View AnswerResponse: 360 30 year: PVA = $170,000 = C {[1 - 1 / (1 + .075/12) ] / (.075/12)}; C = $1,188.66 240 20 year: PVA = $170,000 = C {[1 - 1 / (1 + .075/12) ] / (.075/12)}; C = $1,369.51 extra payment = $1,369.51 - 1,188.66 = $180.85 Topic: LOAN PREPAYMENT 86. Your banker suggests that, rather than obtaining a 30-year mortgage and paying it off early, you should simply obtain a 15-year loan for the same amount. The rate on this loan is 6.75% APR. By how much will your monthly payment be (higher/lower) for the 15-year loan than the regular payment on the 30-year loan? A) lower; $211.57 B) lower; $154.72 C) higher; $ 89.26 D) higher; $315.69 E) higher; $494.59 Register to View AnswerResponse: 360 30 years: PVA = $170,000 = C {[1 - 1 / (1 + .075/12) ] / (.075/12)}; C = $1,188.66 180 15 years: PVA = $170,000 = C {[1 - 1 / (1 + .0675/12) ] / (.0675/12)}; C = $1,504.35 difference = $1,504.35 - 1,188.66 = $315.69 Use the following to answer questions 87-91: Rob and Laura wish to buy a new home. The price is $387,500 and they plan to put 20% down. New Rochelle Savings and Loan will lend them the remainder at a 9% fixed APR for 30 years, with monthly payments to begin in one month. (Ignore taxes.) Topic: CALCULATING PAYMENTS 87. How much will their monthly payments be? A) $2,494.33 B) $2,825.99 C) $3,512.56 D) $3,645.45 E) $3,760.45 Register to View AnswerResponse: PVA = $387,500 (0.8) = C {[1 - 1 / (1 + .09/12) $2,494.33 360 ] / (.09/12)}; C = Topic: TOTAL LOAN COST 88. Assuming they pay off the loan over the 30 year period as planned, what will the total cost (principal + interest + down payment) of the house be? A) $587,500 B) $771,996 C) $854,234 D) $873,760 E) $975,459 Register to View AnswerResponse: 360 PVA = $310,000 = C {[1 - 1 / (1 + .09/12) ] / (.09/12)}; C = $2,494.33 total cost = $77,500 + 2,494.33 x 360 = $975,458.84 Topic: PRESENT VALUE ANNUITY 89. What will the outstanding balance of the loan be after ten years assuming you make the first 120 payments exactly on time? A) $ 99,610 B) $135,467 C) $277,232 D) $239,144 E) $170,509 Register to View Answer240 Response: PVA = $2,494.33 {[1 - 1 / (1 + .09/12) ] / (.09/12)} = $277,232 Topic: CALCULATING PAYMENTS 90. Suppose Rob wants to pay off the loan in 15 years. How much extra must he pay each month to do so? A) $311.25 B) $501.19 C) $649.90 D) $811.35 E) $914.47 Register to View AnswerResponse: 360 30 years: PVA = $310,000 = C {[1 - 1 / (1 + .09/12) ] / (.09/12)}; C = $2,494.33 180 15 years: PVA = $310,000 = C {[1 - 1 / (1 + .09/12) ] / (.09/12)}; C = $3,144.23 difference = $3,144.23 - 2,494.33 = $649.90 Topic: EFFECTIVE RATE 91. Assume that, in order to receive the 30-year loan from Brady Financing, Rob and Laura must pay 3 "points" at the time the loan is originated. (One point equals 1% of the amount to be borrowed.) What is the effective interest rate (EAR) on this loan, after taking the points into account? (Hint: find the discount rate that equates the loan amount with the present value of the loan payments plus the points paid.) A) 8.11% B) 9.00% C) 9.25% D) 9.47% E) 9.75% Register to View AnswerResponse: 360 PVA = $310,000 = C {[1 - 1 / (1 + .09/12) ] / (.09/12)}; C = $2,494.33 360 $300,700 = $2,494.33 {[1 - 1 / (1 + r) ] / r}; r = .007787 12 EAR = (1 + .007787) - 1 = 9.75% Use the following to answer questions 92-97: Given the recent drop in mortgage interest rates, you have decided to refinance your home. Exactly five years ago, you obtained a $150,000 30-year mortgage with a fixed rate of 10%. Today, you can get a 30year loan for the currently outstanding loan balance at 7.5% interest. This loan, however, requires you to pay a $500 appraisal fee and 2 points at the time of the refinancing (1 point equals 1% of the amount borrowed). Ignore tax considerations. Topic: LOAN BALANCE 92. What is the outstanding balance on the loan today, if you just made the 60th payment? A) $108,740 B) $130,938 C) $144,862 D) $128,159 E) $105,159 Register to View AnswerResponse: 360 $150,000 = C {[1 - 1 / (1 + .10/12) ] / (.10/12)}; C = $1,316.36 300 PVA = $1,316.36 {[1 - 1 / (1 + .10/12) ] / (.10/12)} = $144,861.77 Topic: LOAN PAYMENTS 93. How much will your monthly payments be after you refinance? A) $ 743.96 B) $ 805.67 C) $ 932.90 D) $1,012.89 E) $1,153.75 Register to View AnswerResponse: 360 $150,000 = C {[1 - 1 / (1 + .10/12) ] / (.10/12)}; C = $1,316.36 300 PVA = $1,316.36 {[1 - 1 / (1 + .10/12) ] / (.10/12)} = $144,861.77 360 $144,861.77 = C {[1 - 1 / (1 + .075/12) ] / (.075/12)}; C = $1,012.89 Topic: LOAN PAYMENTS 94. By how much will your monthly payments drop if you refinance? A) $141.98 B) $179.36 C) $213.31 D) $270.96 E) $303.47 Register to View AnswerResponse: 360 $150,000 = C {[1 - 1 / (1 + .10/12) ] / (.10/12)}; C = $1,316.36 PVA = $1,316.36 {[1 - 1 / (1 + .10/12) ] / (.10/12)} = $144,861.77 360 $144,861.77 = C {[1 - 1 / (1 + .075/12) ] / (.075/12)}; C = $1,012.89 difference = $1,316.36 - 1,012.89 = $303.47 300 Topic: LOAN COSTS 95. How much is the up-front cash outlay required for you to obtain refinancing? A) $2,897.24 B) $3,147.66 C) $3,397.24 D) $3,500.00 E) $3,817.24 Register to View AnswerResponse: $144,861.77 x .02 + $500 = $3,397.24 Topic: LOAN COSTS 96. Ignoring time value considerations, how many months must you stay in the house to make the refinancing worthwhile? (In other words, how many months are required for the payment savings to equal the dollar outlays required to refinance?) A) 20 months B) 16 months C) 14 months D) 13 months E) 11 months Register to View AnswerResponse: $3,397.24 / $303.47 = 11.19 months Topic: LOAN PAYMENTS 97. For the drop in monthly payments under the refinancing, what proportion of the total savings is attributable to the lower interest rate, as opposed to the amount that is attributable to extending the remaining maturity of your mortgage from 25 years to 30 years? A) 63% B) 72% C) 81% D) 90% E) 100% Register to View AnswerResponse: 300 Old: $144,861.77 = C {[1 - 1 / (1 + .10/12) ] / (.10/12)}; C = $1,316.36 300 New: $144,861.77 = C {[1 - 1 / (1 + .075/12) ] / (.075/12)}; C = $1,070.52 difference = $1,316.36 - 1,070.52 = $245.84; $245.84 / $303.47 = 81% Use the following to answer questions 98-103: With auto loans extending 5,6,7 or more years these days, it is common for buyers who wish to trade in their cars after a few years to find themselves to be "upside down" on the loan. In other words, the outstanding principal on the car loan exceeds the value of the car being traded. Suppose you buy a new Toyota for $25,000, paying nothing down. You agree to a repayment schedule of six equal annual payments beginning one year from today. The banker's required return is 10%, compounded annually. Assume the car will lose 25% of its value the first year and further lose $3,000 each year thereafter. Topic: LOAN PAYMENT 98. How much will your annual payments be? A) $4,621.94 B) $5,740.18 C) $6,121.29 D) $6,664.91 E) $7,563.00 Register to View Answer6 Response: PVA = $25,000 = C (1 - 1/1.1 ) / .1; C = $5,740.18 Topic: DEPRECIATION 99. Given the depreciation schedule above, how much will the car be worth after 3 years? A) $10,000 B) $12,750 C) $14,250 D) $16,250 E) $19,750 Register to View AnswerResponse: $25,000 - 6,250 - 3,000 - 3,000 = $12,750 Topic: DEPRECIATION 100. Given the depreciation schedule above, how much will the car be worth after you have made your final payment? A) $ 1,250 B) $ 3,750 C) $ 6,750 D) $ 8,250 E) $12,250 Register to View AnswerResponse: $25,000 - 6,250 - 3,000(5) = $3,750 Topic: LOAN COST 101. Including principal and interest, what is your total cost for this car? (Assume you make all of your payments on time.) A) $25,000 B) $30,979 C) $34,441 D) $37,899 E) $41,872 Register to View Answer6 Response: PVA = $25,000 = C (1 - 1/1.1 ) / .1; C = $5,740.18; total cost = $5,740.18 x 6 = $34,441 Topic: MARKET VALUE VS PRINCIPAL 102. After which loan payment will you be "right-side up" for the first time? In other words, when does the market value of the car exceed the outstanding balance of the loan for the first time? A) After payment number 1 B) After payment number 2 C) After payment number 3 D) After payment number 4 E) After payment number 5 Register to View Answer1 Response: after 5 payments: PVA = $5,740.18 [(1 - 1/1.1 ) / .1] = $5,218.35; MV = $6,750 Topic: MARKET VALUE VS PRINCIPAL 103. Assume the information as given above, except that you put $5,000 down on the car, so that you only had to borrow $20,000. Now, after which loan payment will you be "rightside up" for the first time? A) After payment number 1 B) After payment number 2 C) After payment number 3 D) After payment number 4 E) After payment number 5 Register to View AnswerResponse: 6 $20,000 = C (1 - 1/1.1 ) / .1; C = $4,592.15 5 after 1 payment: PVA = $4,592.15 [(1 - 1/1.1 ) / .1] = $17,407.86; MV = $18,750 IV. ESSAYS Topic: EAR VERSUS APR 104. Using the example of a savings account, explain the difference between the EAR and the APR. Answer: The EAR is what you actually earn, the APR is a quoted rate. If interest is compounded during the year, the ending balance of a savings account cannot be calculated directly using the APR. Also, in the case of the savings account, the EAR will always be higher than the APR as long as the account is compounded more than once a year and the interest rate is greater than zero. Topic: EAR VERSUS APR 105. If you ran a bank, which rate would you rather advertise on monthly-compounded loans, the EAR or the APR? Which rate would you rather advertise on quarterly-compounded savings accounts, the EAR or the APR? Explain. As a consumer, which would you prefer to see and why? Register to View Answerbank would rather advertise the APR on loans since this rate appears to be lower and the EAR on savings accounts since this appears to be higher. As a consumer, the EAR is the more important rate since it represents the rate actually paid or earned. Topic: COMPARING ANNUITIES 106. You are considering two annuities, both of which make total annuity payments of $10,000 over their life. Which would be worth more today: annuity A, which pays $1,000 at the end of each year for the next 10 years, or annuity B, which pays $775 at the end of the first year, but the annuity payment grows by $50 each year, reaching $1,225 at the end of year 10? Are there any circumstances in which the two would be equal? Explain. Answer: The second annuity weights its payments more toward the back of the period, rather than the front, making it less valuable unless the discount rate is zero. Some students may get tripped up by the fact that the two annuities have the same total payments. This would clearly demonstrate a lack of understanding of the time value of money. Topic: PRESENT VALUE OF AN ANNUITY 107. There are three factors that affect the present value of an annuity. Explain what these three factors are and discuss how an increase in each will impact the present value of the annuity. Answer: The factors are the interest rate, payment amount, and number of payments. An increase in the payment and number of payments will increase the present value, while an increase in the interest rate will decrease the present value. Topic: FUTURE VALUE OF AN ANNUITY 108. There are three factors that affect the future value of an annuity. Explain what these three factors are and discuss how an increase in each will impact the future value of the annuity. Answer: The factors are the interest rate, payment amount, and number of payments. An increase in any of these three will increase the future value of the annuity. Topic: EAR VS. APR 109. Should lending laws be changed to require lenders to report the EAR rather than the APR? Explain. Answer: It would be more meaningful for consumers to know the EAR rather than the APR. The EAR is slightly more difficult to calculate and also more difficult to explain, and may add confusion to the loan process. However, regardless of the costs, it would appear that consumers would benefit from learning what the EAR is as opposed to the APR. Topic: COMPARING ANNUITIES AND PERPETUITIES 110. Annuity A makes annual payments of $813.73 for each of the next 10 years, while annuity B makes annual payments of $500 per year forever. At what interest rate would you be indifferent between the two? At interest rates above/below this break-even rate, which annuity would you choose? Answer: This requires the students to actually use the present value formulas, setting the present value annuity equal to the present value of a perpetuity and solving for the interest rate that makes the two equivalent. The first step is recognizing that the indifference point occurs when the two present values are equal. The break-even rate is 10%: below that rate, the perpetuity is better, while above that rate, the 10-year annuity is preferred. Topic: PERPETUITY PAYMENTS 111. A friend who owns a perpetuity that promises to pay $1,000 at the end of each year, forever, comes to you and offers to sell you all of the payments to be received after the 25th year for a price of $1,000. At an interest rate of 10%, should you pay the $1,000 today to receive payment numbers 26 and onwards? What does this suggest to you about the value of perpetual payments? Answer: The present value of the perpetuity is $10,000, and the present value of the first 25 payments is $9,077.04, thus you should be willing to pay only $922.96 for payments 26 and onwards. This suggests that the value of a perpetuity is derived primarily from the payments received early in its life, and the payments to be received later have little worth today.

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LSU - FIN - 3716
CHAPTER 6 Interest Rates and Bond ValuationI. DEFINITIONSTopic: COUPON 1. The stated interest payment, in dollars, made on a bond each period is called the bond's: A) Coupon. B) Face value. C) Maturity. D) Yield to maturity. E) Coupon rate. Answer: ATo
LSU - FIN - 3716
CHAPTER 7 Equity Markets and Stock ValuationI. DEFINITIONSTopic: GROWING PERPETUITY 1. An asset characterized by cash flows that increase at a constant rate forever is called a: A) Growing perpetuity. B) Growing annuity. C) Common annuity. D) Perpetuity
LSU - FIN - 3716
CHAPTER 8 Net Present Value and Other Investment CriteriaI. DEFINITIONSTopic: NET PRESENT VALUE 1. The difference between the market value of an investment and its cost is the: A) Net present value. B) Internal rate of return. C) Payback period. D) Prof
LSU - FIN - 3716
CHAPTER 9 Making Capital Investment DecisionsI. DEFINITIONS Topic: INCREMENTAL CASH FLOWS 1. The changes in the firm's future cash flows that are a direct consequence of accepting a project are called: A) Incremental cash flows. B) Stand-alone cash flows
LSU - FIN - 3716
CHAPTER 10Some Lessons from Capital Market HistoryI.DEFINITIONSTopic: RISK PREMIUM 1. The excess return required on a risky asset over that earned on a risk-free asset is called (a): A) Risk premium. B) Return premium. C) Excess return. D) Average ret
LSU - FIN - 3716
CHAPTER 11 Risk and ReturnI. DEFINITIONSTopic: PORTFOLIOS 1. A portfolio is _. A) a group of assets, such as stocks and bonds, held as a collective unit by an investor B) the expected return on a risky asset C) the expected return on a collection of ris
LSU - FIN - 3716
CHAPTER 12 Cost of CapitalI. DEFINITIONSTopic: COST OF CAPITAL 1. The opportunity cost associated with the firm's capital investment in a project is called its: A) Cost of capital. B) Beta coefficient. C) Capital gains yield. D) Sunk cost. E) Internal r
LSU - FIN - 3716
CHAPTER 15 Raising CapitalI. DEFINITIONSTopic: VENTURE CAPITAL 1. The financing provided for start-up, often high-risk, private business enterprises is called: A) Venture capital. B) Junk bonds. C) Flotation costs. D) Initial public offerings. E) Financ
LSU - FIN - 3716
CHAPTER 13 Leverage and Capital StructureI. DEFINITIONSTopic: HOMEMADE LEVERAGE 1. The use of personal borrowing to change the overall amount of financial leverage to which the individual is exposed is called: A) Homemade leverage. B) Dividend recapture
LSU - FIN - 3716
CHAPTER 16 Short-Term Financial PlanningI. DEFINITIONSTopic: OPERATING CYCLE 1. The length of time between the acquisition of inventory and the collection of cash from receivables is called the _. A) operating cycle B) inventory period C) accounts recei
LSU - FIN - 3716
CHAPTER 14 Dividends and Dividend PolicyI. DEFINITIONSTopic: DIVIDENDS 1. Payments made out of a firm's earnings to its owners in the form of cash or stock are called: A) Dividends. B) Distributions. C) Share repurchases. D) Payments-in-kind. E) Stock s
LSU - FIN - 3716
CHAPTER 17 Working Capital ManagementI. DEFINITIONSTopic: SPECULATIVE MOTIVE 1. The need to hold cash to take advantage of additional investment opportunities is called the: A) Speculative motive. B) Precautionary motive. C) Transaction motive. D) Float
LSU - FIN - 3716
CHAPTER 18 International Aspects of Financial ManagementI. DEFINITIONSTopic: AMERICAN DEPOSITORY RECEIPT 1. A security that is issued in the United States that represents shares of a foreign stock and allows that stock to be traded in the United States
LSU - FIN - 3716
CHAPTER 13 RISK, RETURN, AND THE SECURITY MARKET LINEAnswers to Concepts Review and Critical Thinking Questions 1. Some of the risk in holding any asset is unique to the asset in question. By investing in a variety of assets, this unique portion of the t
LSU - FIN - 3716
FIN3716- Fall 2010MIDTERM 1 SOLUTION Name _ Time: 75 Min Section_ Total Point: 70Work on this exam is to be yours alone. Any discussion of either the questions or your answers with anyone other than your instructor will be considered as cheating and, th
LSU - FIN - 3716
FI 3716- Fall 2010MIDTERM 2 SOLUTIO Name _ Time: 75 Min Section_ Total Point: 68Work on this exam is to be yours alone. Any discussion of either the questions or your answers with anyone other than your instructor will be considered as cheating and, thu
LSU - FIN - 3716
FIN3716- Fall 2010MIDTERM 3 SOLUTION Name _ Time: 75 Min Section_ Total Point: 60Work on this exam is to be yours alone. Any discussion of either the questions or your answers with anyone other than your instructor will be considered as cheating and, th
LSU - FIN - 3716
CHAPTER 2 FINANCIAL STATEMENTS, TAXES AND CASH FLOWAnswers to Concepts Review and Critical Thinking Questions 1. Liquidity measures how quickly and easily an asset can be converted to cash without significant loss in value. Its desirable for firms to hav
LSU - FIN - 3716
The formula sheet is the appendix copied out the back of the book. These might not be the exact problems, but they are pretty similar and Id suggest knowing how to do them.Given the following information, what is the firm's weighted average cost of capit
LSU - FIN - 3716
Chapter 5CalculatorsI ntroduction to V aluation: The Time Click to edit Master subtitle style V alue of M oneyMcGraw-Hill/IrwinCopyright 2010 by The McGraw-Hill Companies, Inc. All rights reserved.Key Concepts and Skills Be able to compute the fu
LSU - FIN - 3716
Chapter 1 I ntroduction to Corporate FinanceMcGraw-Hill/IrwinCopyright 2010 by The McGraw-Hill Companies, Inc. All rights reserved.Key Concepts and Skills Know the basic types of financial management decisions and the role of the financial manager Kno
LSU - FIN - 3716
Chapter 7 I nterest Rates and Bond ValuationClick to edit Master subtitle styleMcGraw-Hill/IrwinCopyright 2010 by The McGraw-Hill Companies, Inc. All rights reserved.Key Concepts and Skills Know the important bond features and bond types Understand
LSU - FIN - 3716
Chapter 6CalculatorsDiscounted Cash Flow Valuation Click to edit Master subtitle styleMcGraw-Hill/IrwinCopyright 2010 by The McGraw-Hill Companies, Inc. All rights reserved.Key Concepts and Skills Be able to compute the future value of multiple cas
LSU - FIN - 3716
Chapter 3 Working With Financial StatementsClick to edit Master subtitle styleMcGraw-Hill/IrwinCopyright 2010 by The McGraw-Hill Companies, Inc. All rights reserved.Sample Balance Sheet2009 Cash A/R Inventory Other CA Total CA Net FA Total Assets 696
LSU - FIN - 3716
Chapter 2 Financial Statements, Taxes, and Cash FlowMcGraw-Hill/IrwinCopyright 2010 by The McGraw-Hill Companies, Inc. All rights reserved.Balance SheetThe balance sheet is a snapshot of the firms assets and liabilities at a given point in time Assets
LSU - ACCT - 3122
.uuitarUilVEISlnCompany No. 410764-PTUI ABDUllIAZAIlKELANA JAVA STUDV CENTRE 18-5 PLAZA CCl, JAlAN PERBANDARAN 556/12 KElANA JAVA URBAN CENTRE 47301 KElANA JAVAFINAL EXAMINATION AUGUST 2007mmmmmmmmmmmmmmmmmmmmmmmmmmmmmmmmmmmmmmmmmmmmmmmmmCOURSE TIT
LSU - ACCT - 3122
LSU - ACCT - 3122
IFIDENTTAL / SULITTemplate (A) Rev. 1: March 2008UNIVERSITIFINAL EXAMINATION JANUARY 2009 COURSE TITLECOMPUTERISED ACCOUNTING SYSTEMS AAD 2043 02 MAY 2009/SATURDAY 09.00 AM - 12.00 PM /3 HOURSCOURSE CODE DATE/DAYTIME/DURATIONINSTRUCTIONS
LSU - ACCT - 3122
LSU - ACCT - 3122
LSU - ACCT - 3122
Accounting 384 - Midterm Fall 2008 (150 points) Name_ Section _ MULTIPLE CHOICE (15 questions @ 4 points each = 60 total points) Identify the choice that best completes the statement or answers the question. 1. Information that does not omit important asp
LSU - ACCT - 3122
KELANA JAYA STUDY CENTRE 18-5 PLAZA CCL, JALAN PERBANDARAN SS6/12 KELANA JAYA URBAN CENTRE 47301 KELANA JAYABACHELOR OF ACCOUNTING MID-TERM EXAMINATION SEMESTER-JANUARY 2006COURSE TITLE COURSE CODE DATE/DAY TIME DURATION: : : : :ACCOUNTING INFORMATION
LSU - ACCT - 3122
LSU - GEOL - 1001
Igneous RocksIgneous Rocks Solidified molten rock (which freezes at high temp). Earth is mostly igneous rock. Earth Magma Subsurface melt. Magma Lava Melt at the surface.Magma erupts via volcanoes.Earth: Portrait of a Planet, 3rd edition, by Stephe
LSU - GEOL - 1001
Magma and Igneous RocksEarth: Portrait of a Planet, 3rd edition, by Stephen MarshakChapter 6: Up from the Inferno: Magma and Igneous RocksMagma Formation MagmaPartial melting in Partial crust / upper mantle. crustGeothermal gradient Earth is hot insi
LSU - GEOL - 1001
Weathering and Sedimentary RocksThe Twelve Apostles of Victoria, Australia are erosional remnants called stacks.Earths external processesWeathering the physical breakdown and chemical alteration of rock at or near Earths surfacePhysical - Mechanical b
LSU - GEOL - 1001
MASS WASTING is the downhill movement of soil or fractured rock under the force of gravityA debris avalanche covers portions of the Cascade Glacier, west of the Saint Elias Range in Alaska. The one pictured was the largest of several dozen triggered by a
Cal Poly Pomona - ECON - 500
Homework #1 For all the questions below, you need to show as much in detail as possible the process or the reasoning by which you arrive at the answer. Q.1 (20 points) Explain the reason why economic efficiency has to be compromised as a result of enhanci
Joliet Junior College - CMENS - 1101
Lab #2: Oscilloscopes and Time Varying SignalsEngr. 221 October 20, 2010 Dr. Paul Hummel Louisiana Tech UniversitySajan Prakash Shrestha Group Member: Alana Lum York Rodolphe S. YoumbiExperiment List (1) Tektronics TDS 210 two channel digital Oscillosc
Michigan State University - MTH - 234
CHAPTER 1 PRELIMINARIES1.1 REAL NUMBERS AND THE REAL LINE 1. Executing long division, 2. Executing long division," 9 " 11oe 0.1,2 9oe 0.2,2 113 9oe 0.3,3 118 9oe 0.8,9 119 9oe 0.911 11oe 0.09,oe 0.18,oe 0.27,oe 0.81,oe 0.993. NT = nec
Rutgers - ACCOUNTING - 102
IntroductiontoManagerialAccounting Fall2009DivyaAnantharaman Session10&11:November5 thandNovember12 th Shorttermdecisionmaking Learningobjectivesforthissessionare: Understandthestepsinthedecisionmakingcycle Understandthekeyconceptofrelevantcosts Learntodi
LSU - RNR - 1001
Study Guide Chapter 4 - Biodiversity and Evolution The American alligator is an important keystone species in southern wetland ecosystems, and has made a significant comeback since the 1960s. It contributes significantly to the Louisiana economy, and cont
University of Phoenix - BUS - 210
o o oWhat motivation theories may be found in this case study? Describe the theory(ies) found in this case study and cite specific examples. What was the business owners approach to creating high-performing teams within this company?One motivational the
University of Phoenix - BUS - 210
Gus Arrieta Job Fair Brochure Text details BUS/210 July 4th, 2010 Nancy G. MartinezThe market for hookah lounges in the U.S. has spread incredibly fast in the past decade. According to Palo Alto Software (1996-2010),Hookah-bars.com reports that as of Oct
University of Phoenix - BUS - 210
BUS 210 Course CalendarMonday Week 1 BUS 210 Week 2 BUS 210 Week 3 BUS 210 Week 4 BUS 210 Week 5 BUS 210 Week 6 BUS 210 Week 7 BUS 210 Week 8 BUS 210 Week 9 BUS 210 Day 1 Day 2 Capstone Discussion Question Day 1 Day 2 Day 3 Day 4 Day 5 Day 6 Day 3 Day 4
University of Phoenix - BUS - 210
Joint Stock Companies are the decision to raise capital by sharing some of the businesses stock around to investors. The idea is to share the risky investments from a business this way by not having all of your eggs in one single basket in case it all fal
University of Phoenix - BUS - 210
Joint Stock Companies are the decision to raise capital by sharing some of the businesses stock around to investors. The idea is to share the risky investments from a business this way by not having all of your eggs in one single basket in case it all fal
University of Phoenix - BUS - 210
Checkpoint due Friday 5/28/2010Vitamin Shoppe City Of Industry, CA Product name : USP Labs Anabolic Pump The Product Anabolic Pump by USP Labs is a supplement that incorporates the burn fat, gain muscle results through maintaining a high complex carb die
University of Phoenix - BUS - 210
o o oWhat motivation theories may be found in this case study? Describe the theory(ies) found in this case study and cite specific examples. What was the business owners approach to creating high-performing teams within this company?One motivational the
University of Phoenix - BUS - 210
Front of BrochureQuickTime and a decompressor are needed to see this picture.BackQuickTime and a decompressor are needed to see this picture.
University of Phoenix - BUS - 210
Assignment: Club IT Part 21Assignment: Club IT Part 2 Gus Arrieta XBIS/219 September 5th, 2010 Shawn RiederAssignment: Club IT Part 2 Assignment: Club IT Part 2 Club IT has an exceedingly impressive future with the development of its information system
University of Phoenix - BUS - 210
Checkpoint: Web 2.01Checkpoint: Web 2.0 Gus Arrieta XBIS/219 September 17th, 2010 Shawn ReiderCheckpoint: Web 2.0 Checkpoint: Web 2.0 Web 2.0, the second generation of the World Wide Web is the movement way from static WebPages to dynamic and shareable
University of Phoenix - BUS - 210
Checkpoint: Internet Privacy1Checkpoint: Internet Privacy Gus Arrieta BIS/219 September 10, 2010 Shawn Rieder DM/IST, MBA, MISCheckpoint: Internet Privacy Internet Privacy In our lives we are susceptible to privacy invasion through the electronic retri
University of Phoenix - BUS - 210
Gus Arrieta XBIS/219 Club IT Part 11Gus Arrieta Club IT part 1 XBIS/219 August 19th, 2010 Shawn RiederIn this day and age, Information goes a long way. Information technologyGus Arrieta XBIS/219 Club IT Part 1 establishes many routes to provide this w
University of Phoenix - BUS - 210
Running head: Final Project: Club IT Part Three1Final Project: Club IT Part Three Gus Arrieta XBIS/219 September 25, 2010 Shawn M. Rieder DM/IST, MBA, MISClub IT Part Three Club IT Part Three2The numbers from a respective view have increased at Club
University of Phoenix - BUS - 210
1 Checkpoint: Problems at JetBlueGus Arrieta Xbis/219 Checkpoint: Problems at JetBlue August 24, 2010 Shawn Reider2 Checkpoint: Problems at JetBlue This story reminded me of the book of Proverbs, .to know wisdom and instruction, to understand words of i
University of Phoenix - BUS - 210
Gus Arrieta Checkpoint: SDLC1Gus Arrieta Checkpoint: SDLC XBIS/219 Friday September 3rd 2010 Shawn RiederGus Arrieta Checkpoint: SDLCThe systems development life cycle (SDLC) is a structured framework most organizations use today that consists of dist
University of Phoenix - BUS - 210
Gus Arrieta XBIS/219 Club IT Part 11Gus Arrieta Club IT part one XBIS/219 August 19th, 2010 Shawn RiederGus Arrieta XBIS/219 Club IT Part 1 Information goes a long way. Information technology establishes many routes to provide this wide array of inform
University of Phoenix - BUS - 210
Gus Arrieta Amazon Evolution XBIS/219 August 8th, 2010 Shawn RiederAmazons initial strategy was to become the most useful source of online retailer. Though many of its competitions have multiplied throughout its times. The other deficiency is that those
University of Phoenix - BUS - 210
Gus Arrieta to Kelly Weber - Peer Review on EssayCOM 150Axia College MaterialAppendix G Peer Review Checklist*What is the main point of this essay? -The essay is about death and the way other cultures and countries deal with the grieving process and t
University of Phoenix - BUS - 210
Axia College MaterialAppendix I Proofreading ChecklistYesX X X X X X X X X X X X X X XHave I followed the directions provided in the syllabus for this assignment? Are the title page, paper setup, numbering, and margins in APA format? Have I used Times