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# fmt5 - Chapter 5 Introduction to Valuation The Time Value...

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Chapter 5 Introduction to Valuation: The Time Value of Money Chapter 05 Quiz A Student Name_________________________ Student ID ____________ ________ 1. Cornerstone Bank pays interest of 3.5 percent compounded annually. Uptown Bank pays 3.75 percent simple interest. Which one of the following statements is true if you invest \$1,000 in each bank for five years? a. Cornerstone Bank will pay you a total of \$176.59 in interest over the five years. b. Uptown Bank will pay you \$15.30 less interest over the five years than Cornerstone Bank will. c. Cornerstone Bank will pay you a total of \$175.00 in interest over the five years. d. Uptown Bank will pay you \$0.19 less interest than Cornerstone Bank over the five years. ________ 2. Rosa wants to have \$50,000 in her investment account fifteen years from now. How much does she have to deposit today to achieve her goal if she can earn 9.5 percent compounded annually? ________ 3. Carlos has \$2,413 saved today. He wants to buy a different vehicle as soon as he has \$2,700 saved. How long does he have to wait to get his vehicle if he earns 4.5 percent compounded annually? ________ 4. ABC Co. currently pays an annual dividend of \$2.60 per share. At what rate must the company increase the dividend if they want to pay \$3.20 a share four years from now? ________ 5. Sun borrows \$13,500 today at 7.90 percent compounded annually. The terms of the loan require him to repay the principal and interest in one lump sum three years from today. How much will he have to pay in three years? a. \$16,528.28 b. \$16,666.67 c. \$16,874.16 d. \$16,958.92 ________ 6. All else equal, the present value _____ as the period of time increases. a. increases b. decreases c. remains constant ________ 7. You have been offered a business opportunity that will pay you \$57,000 in six years if you invest \$25,000 today. What is the expected rate of return on this investment? ________ 8. According to the Rule of 72, how long will it take to double your money if you can earn a 12 percent rate of return? ________ 9. Five years ago, Leslie had \$23,460 in her savings account. Today, she deposited an additional \$6,000. She plans to deposit another \$6,000 into this account next year. How much money will she have in her account ten years from today if she earns 7.5 percent on her savings? ________ 10. One hundred years ago, your great-grandfather purchased a 300-acre farm for the princely sum of \$2,500. Today, that farm is still owned by your family and is currently valued at \$1.8 million. What rate of return has your family on this investment by your great-grandfather? a. 5.72 percent b. 6.80 percent c. 7.03 percent d. 7.47 percent 5-1

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Chapter 5 Introduction to Valuation: The Time Value of Money Chapter 05 Quiz A Answers 1. d Cornerstone Bank: \$1,000(1.035) 5 – \$1,000 = \$187.69 compound interest Uptown Bank: \$1,000(.0375)(5) = \$187.50 simple interest Difference in interest payments = \$187.69 – \$187.50 = \$.19 Uptown Bank will pay you \$.19 less interest than Cornerstone Bank over the five years.
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fmt5 - Chapter 5 Introduction to Valuation The Time Value...

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