978-0134083285 Chapter 5 Part 5

Unlock access to all the studying documents.

View Full Document

23) If you want to have $3,575 in 29 months, how much money must you put in a savings account today?

Assume that the savings account pays 12% and it is compounded monthly; round to nearest $1.

A) $3,147

B) $3,008

C) $2,679

D) $2,438

Keywords: Present Value, Monthly Compounding

Learning Obj.: L.O. 5.3

AACSB: Analytical Thinking

24) If you want to have $12,500 in 57 months, how much money must you put in a savings account today?

Assume that the savings account pays 4.5% and it is compounded quarterly; round to nearest $1.

A) $8,459

B) $10,106

C) $10,387

D) $11,129

Keywords: Present Value, Quarterly Compounding

Learning Obj.: L.O. 5.3

AACSB: Analytical Thinking

25) If Cindy deposits $12,000 into a bank account that pays 6% interest compounded semiannually, what

will the account balance be in seven years?

A) 18,151

B) 14,356

C) 16,987

D) 15,555

Keywords: Future Value, Semiannual Compounding

Learning Obj.: L.O. 5.3

AACSB: Analytical Thinking

26) If Cathy deposits $12,000 into a bank account that pays 6% interest compounded quarterly, what will

the account balance be in seven years?

A) 18,001

B) 18,207

C) 19,112

D) 19,344

Keywords: Future Value, Quarterly Compounding

Learning Obj.: L.O. 5.3

AACSB: Analytical Thinking

27) To compound $100 quarterly for 20 years at 8%, we must use

A) 40 periods at 4%.

B) 5 periods at 12%.

C) 10 periods at 4%.

D) 80 periods at 2%.

Keywords: Future Value, Quarterly Compounding

Learning Obj.: L.O. 5.3

AACSB: Analytical Thinking

28) Andre’s wonderful parents established a college savings plan for him when he was born. They

deposited $50 into the account on the last day of each month. The account has earned 10.9% compounded

monthly, tax-free. How much can they withdraw on his 18th birthday to spend on his education?

A) $27,560

B) $30,028

C) $33,307

D) $43,730

Keywords: Future Value, Annuity, Monthly Compounding

Learning Obj.: L.O. 5.3

AACSB: Analytical Thinking

29) Cary‘s wonderful parents established a college savings plan for him when he was born. They

deposited $50 into the account on the last day of each month. The account has earned 10% compounded

monthly, tax-free. Now he’s off to State U. What equal amount can they withdraw beginning today (his

18th birthday) and each year for three additional years to spend on his education, assuming that the

account now earns 7% annually.

A) $8,285

B) $8,865

C) $9,486

D) $30,028

Keywords: Annuity, Monthly Compounding, Annuity Payment

Learning Obj.: L.O. 5.3

AACSB: Analytical Thinking

30) You discover an antique in your attic that you purchased at an estate sale 10 years ago for $400. You

auction it on eBay and receive $8,000 for your item. What annual rate of return did you earn?

A) 200.00%

B) 34.93%

C) 30.47%

D) 20.00%

Keywords: Annual Rate of Return

Learning Obj.: L.O. 5.3

AACSB: Analytical Thinking

31) Last National Bank is offering you a loan at 10%; payments on the loan are to be made monthly.

Credit Onion is offering you a loan where payments are to be made semiannually; the rate on the loan is

also 10%. Local Bank down the street is also offering a loan at 10% where the payments are made

quarterly. Which loan has the lowest annual cost?

A) Last National Bank’s loan

B) Local Bank’s loan

C) Credit Onion’s loan

D) All of the loans will have the same annual cost.

Keywords: Compounding Periods, Bank Loan

Learning Obj.: L.O. 5.3

AACSB: Analytical Thinking

32) You have $25,000 in an investment account today. How much will be in the account in 30 years if the

account earns (a) 8% per year, (b) 8% compounded semiannually, (c) 8% compounded quarterly, (d) 8%

compounded monthly, and (e) 8% compounded daily? Comment on the effect of more frequent

compounding.

Keywords: Effective Annual Rate, Future Value

Learning Obj.: L.O. 5.3

AACSB: Analytical Thinking

33) Why does the future value of a given amount increase when interest is compounded nonannually as

opposed to annually?

Keywords: Compounding Periods, Effective Annual Rate

Learning Obj.: L.O. 5.3

AACSB: Analytical Thinking

Learning Objective 5.4

1) A share of preferred stock that pays the same annual dividend forever is an example of a perpetuity.

Keywords: Perpetuity, Preferred Stock

Learning Obj.: L.O. 5.4

AACSB: Reflective Thinking

2) The present value of a $100 perpetuity discounted at 5% is $5,000.

Keywords: Perpetuity

Learning Obj.: L.O. 5.4

AACSB: Analytical Thinking

3) You won the lottery and can receive either (1) $60,000 today, or (2) $10,000 one year from today plus

$25,000 two years from today plus $35,000 three years from today. You plan to use the money to pay for

your child’s college education in 15 years. You should

A) take the $60,000 today because of the time value of money regardless of current interest rates.

B) take option two because you get $70,000 rather than $60,000 regardless of current interest rates.

C) take the $60,000 today only if the current interest rate is at least 16.67%.

D) take the $60,000 today if you can earn 6.81% per year or more on your investments.

Keywords: Present Value, Uneven Cash Flows

Learning Obj.: L.O. 5.4

AACSB: Analytical Thinking

4) You have just purchased a share of preferred stock for $50.00. The preferred stock pays an annual

dividend of $5.50 per share forever. What is the rate of return on your investment?

A) 0.055

B) 0.010

C) 0.110

D) 0.220

Keywords: Perpetuity, Preferred Stock

Learning Obj.: L.O. 5.4

AACSB: Analytical Thinking

5) What is the value on 1/1/13 of the following cash flows:

Date Cash Received

Amount of Cash

1/1/14

$14,000

1/1/15

$20,000

1/1/16

$30,000

1/1/17

$43,000

1/1/18

$57,000

Use a 7% discount rate, and round your answer to the nearest $10.

A) $153,270

B) $128,490

C) $112,350

D) $107,330

Keywords: Uneven Cash Flows, Present Value

Learning Obj.: L.O. 5.4

AACSB: Analytical Thinking

6) An investment is expected to yield $300 in three years, $500 in five years, and $300 in seven years.

What is the present value of this investment if our opportunity rate is 5%?

A) $735

B) $864

C) $885

D) $900

Keywords: Present Value, Uneven Cash Flows

Learning Obj.: L.O. 5.4

AACSB: Analytical Thinking

7) You have been depositing money at the end of each year into an account drawing 8% interest. What is

the balance in the account at the end of year four if you deposited the following amounts?

Year

End of Year Deposit

$350

$500

$725

$400

A) $1,622

B) $2,207

C) $2,384

D) $2,687

Keywords: Future Value, Uneven Cash Flows

Learning Obj.: L.O. 5.4

AACSB: Analytical Thinking

8) You invest $1,000 at a variable rate of interest. Initially the rate is 4% compounded annually for the first

year, and the rate increases one-half of one percent annually for five years (year two’s rate is 4.5%, year

three’s rate is 5.0%, etc.). How much will you have in the account after five years?

A) $1,276

B) $1,359

C) $1,462

D) $1,338

Keywords: Future Value, Variable Interest Rate

Learning Obj.: L.O. 5.4

AACSB: Analytical Thinking

9) An investment will pay $500 in three years, $700 in five years and $1000 in nine years. If your

opportunity rate is 6%, what is the present value of this investment?

Keywords: Present Value, Uneven Cash Flows

Learning Obj.: L.O. 5.4

AACSB: Analytical Thinking

10) What is the present value of the following perpetuities?

a. $200 per year discounted at 6% annually

b. $500 per year discounted at 9% annually

c. $1,000 per year discounted at 5% annually

d. $550 per year discounted at 8% annually

Keywords: Perpetuity, Present Value

Learning Obj.: L.O. 5.4

AACSB: Analytical Thinking