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Exam
Name___________________________________
MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question.
1)
Consider the following timeline detailing a stream of cash flows:
If the current market rate of interest is 10%, then the present value of this stream of cash flows is
closest to:
1)
A)
$600
B)
$674
C)
$460
D)
$287
2)
You are looking for a new truck and see the following advertisement. "Own a new truck! No
money down. Just five easy annual payments of $8000." You know that you can get the same truck
from the dealer across town for only $31,120. The interest rate for the deal advertised is closest to:
2)
A)
8%
B)
9%
C)
8.5%
D)
10%
3)
Consider the following timeline detailing a stream of cash flows:
If the current market rate of interest is 8%, then the present value of this stream of cash flows is
closest to:
3)
A)
$26,000
B)
$22,871
C)
$21,211
D)
$24,074
4)
You are considering investing in a security that will pay you $80 in interest at the end of each of the
next 10 years. If this security is currently selling for $588.81, then the IRR for investing in this
security is closest to:
4)
A)
7.0%
B)
6.5%
C)
5.0%
D)
6.0%
5)
Which of the following statements is false?
5)
A)
An annuity is a stream of N equal cash flows paid at irregular intervals.
B)
The difference between an annuity and a perpetuity is that an annuity ends after some fixed
number of payments.
C)
A growing perpetuity is a cash flow stream that occurs at regular intervals and grows at a
constant rate forever.
D)
Most car loans, mortgages, and some bonds are annuities.
6)
You have an investment opportunity that will cost you $10,000 today, but return $12,500 to you in
one year. The IRR of this investment opportunity is closest to:
6)
A)
125%
B)
25%
C)
80%
D)
20%
Use the information for the question(s) below.
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.
7)
Assuming that costs continue to increase an average of 4% per year, tuition and other costs for one
year for this student in 18 years when she enters college will be closest to:
7)
A)
$320,568
B)
$12,500
C)
$21,500
D)
$25,323
8)
It has long been told that the Dutch purchased Manhattan island in 1626 for the value of 60 guilders
($24). Assuming that the Dutch invested this money into an account earning 5%, approximately
how much would their investment be worth 380 years later in 2006?
8)
A)
$2.7 billion
B)
$3.1 billion
C)
$4.5 billion
D)
$1.9 trillion
9)
The British government has just issued a new consol bond that sells for £1000 and pays interest of
8%. The annual interest payment on this bond must be:
9)
A)
£80
B)
£8
C)
£12,500
D)
£1000
10)
The British government has a consol bond outstanding that pays 100 in interest each year.
Assuming that the current interest rate in Great Britain is 5% and that you will receive your first
interest payment immediately upon purchasing the consol bond, then the value of the consol bond
is closest to:
10)
A)
2100
B)
1100
C)
1000
D)
2000
11)
You work for a pharmaceutical company that has developed a new drug. The patent on the drug
will last for 17 years. You expect that the drug will produce cash flows of $10 million in its first
year and that this amount will grow at a rate of 4% per year for the next 17 years. Once the patent
expires, other pharmaceutical companies will be able to produce generic equivalents of your drug
and competition will drive any future profits to zero. If the interest rate is 12% per year, then the
present value of producing this drug is closest to:
11)
A)
$90 million
B)
$105 million
C)
$71 million
D)
$170 million
12)
You are considering purchasing a new home. You will need to borrow $250,000 to purchase the
home. A mortgage company offers you a 15 year fixed rate mortgage (180 months) at 9% APR
(0.75% month). If you borrow the money from this mortgage company, your monthly mortgage
payment will be closest to:
12)
A)
$660
B)
$2,585
C)
$1,390
D)
$2,535
13)
If the current rate of interest is 8%, then the present value of an investment that pays $1000 per year
and lasts 20 years is closest to:
13)
A)
$18,519
B)
$20,000
C)
$9,818
D)
$45,761
14)
Consider the following timeline:
If the current market rate of interest is 7%, then the future value of this timeline as of year 3 is
closest to:
14)
A)
$1720
B)
$1404
C)
$1717
D)
$1500
15)
Which of the following statements regarding growing perpetuities is false?
15)
A)
To find the value of a growing perpetuity one cash flow at a time would take forever.
B)
We assume that r < g for a growing perpetuity.
C)
A growing perpetuity is a cash flow stream that occurs at regular intervals and grows at a
constant rate forever.
D)
PV of a growing perpetuity =C
r - g
16)
Consider the following timeline:
If the current market rate of interest is 9%, then the present value of this timeline as of year 0 is
closest to:
16)
A)
$492
B)
$400
C)
$637
D)
$600
17)
Which of the following statements is false?
17)
A)
Most investment opportunities have multiple cash flows that occur at different points in time.
B)
FV =
N
n= 0
Cn× (1 +r)n
C)
PV =
N
n= 0
Cn
(1 +r)n
D)
FV =PV
(1 +r)n
18)
Consider the following timeline detailing a stream of cash flows:
If the current market rate of interest is 6%, then the future value of this stream of cash flows is
closest to:
18)
A)
$1,626
B)
$1,288
C)
$1,723
D)
$1,500
19)
Your son is about to start kindergarten in a private school. Currently, the tuition is $12,000 per
year, payable at the start of the school year. You expect annual tuition increases to average 6% per
year over the next 13 years. Assuming that you son remains in this private school through high
school and that your current interest rate is 6%, then the present value of your son's private school
education is closest to:
19)
A)
$106,230
B)
$137,900
C)
$156,000
D)
This problem cannot be solved
Use the figure for the question(s) below.
20)
Which of the following statements regarding the timeline is false?
20)
A)
You will find the timeline most useful in tracking cash flows if you interpret each point on the
timeline as a period or interval of time.
B)
Date 0 is the beginning of the first year.
C)
Date 1 is the end of the first year.
D)
The space between date 0 and date 1 represents the time period between two specific dates.
21)
Which of the following statements regarding the timeline is false?
21)
A)
The $5000 below date 2 is the payment you will receive at the beginning of the second year.
B)
Date 0 represents today.
C)
The $5000 below date 1 is the payment you will receive at the end of the first year.
D)
Date 1 is one year from now.
22)
Which of the following statements regarding perpetuities is false?
22)
A)
To find the value of a perpetuity one cash flow at a time would take forever.
B)
PV of a perpetuity =r
C
C)
One example of a perpetuity is the British government bond called a consol.
D)
A perpetuity is a stream of equal cash flows that occurs at regular intervals and lasts forever.
23)
Suppose you invest $1000 into a mutual fund that is expected to earn a rate of return of 10%. The
amount of money will you have in 10 years is closest to which of the following? The amount you
will have in 50 years is closest to which of the following?
23)
A)
$386; $9
B)
$2,594; $45,259
C)
$2,594; $117,391
D)
$3,138; $ 1,311,892
24)
You are offered an investment opportunity that costs you $28,000,has an NPV of $2278, lasts for
three years, has interest rate of 10%, and produces the following cash flows:
The missing cash flow from year 2 is closest to:
24)
A)
$12,000
B)
$10,000
C)
$13,000
D)
$12,500
25)
The British government has a consol bond outstanding that pays 100 in interest each year.
Assuming that the current interest rate in Great Britain is 5% and that you will receive your first
interest payment one year from now, then the value of the consol bond is closest to:
25)
A)
1000
B)
2000
C)
2100
D)
1100
26)
If the current rate of interest is 8%, then the future value 20 years from now of an investment that
pays $1000 per year and lasts 20 years is closest to:
26)
A)
$93,219
B)
$36,725
C)
$9,818
D)
$45,761
27)
Consider the following timeline:
If the current market rate of interest is 8%, then the value as of year 1 is closest to:
27)
A)
$77
B)
$0
C)
$540
D)
$1003
28)
Your son is about to start kindergarten in a private school. Currently, the tuition is $12,000 per
year, payable at the start of the school year. You expect annual tuition increases to average 6% per
year over the next 13 years. Assuming that you son remains in this private school through high
school and that your current interest rate is 7%, then the present value of your son's private school
education is closest to:
28)
A)
$156,000
B)
$155,800
C)
$137,900
D)
$332,300
29)
After your grandmother retired, she purchased an annuity contract for $250,000 that will pay her
$25,000 at the end of every year until she dies. The appropriate interest rate for this annuity is 8%.
The number of years that your grandmother must live in order to get more value out of the annuity
than what she paid for it is closest to:
29)
A)
8
B)
10
C)
21
D)
16
30)
You have been offered the following investment opportunity, if you pay $2500 today, you will
receive $1000 at the end of each of the next three years. Assuming that you could otherwise earn
10% per year on your money, the NPV for this opportunity is closest to:
30)
A)
-$13
B)
$18
C)
$500
D)
$12
31)
You are saving for retirement. To live comfortably, you decide that you will need $2.5 million
dollars by the time you are 65. If today is your 30th birthday, and you decide, starting today, and
on every birthday up to and including your 65th birthday, that you will deposit the same amount
into your savings account. Assuming the interest rate is 5%, the amount that you must set aside
each and every year on your birthday is closest to:
31)
A)
$27,680
B)
$26,100
C)
$71,430
D)
$26,260
32)
Suppose that you deposit $10,000 in an account that pays 6% interest and you want to know how
much will be in your account at the end of 10 years. To solve this problem in Microsoft Excel, you
would use which of the following Excel formulas?
32)
A)
=PV(.06,10,0,10000)
B)
=FV(.06,10000,0,10)
C)
=FV(.06,10,0,10000)
D)
=PV(.06,10000,0,10)
33)
Which of the following statements is false?
33)
A)
FV =C
(1 +r)n
B)
The process of moving a value or cash flow forward in time is known as compounding.
C)
The value of a cash flow that is moved forward in time is known as its future value.
D)
The process of moving a value or cash flow backward in time is known as discounting.
Use the table for the question(s) below.
Year A B
0-$150 -$225
140 175
280 125
3100 -50
34)
If the interest rate is 6%, then the NPV of investment "A" is closest to:
34)
A)
-$32
B)
$9
C)
$70
D)
$43
Use the figure for the question(s) below.
35)
Which of the following statements regarding timelines is false?
35)
A)
A timeline is a linear representation of the timing of the (expected) cash flows.
B)
Not every stream of cash flows can be represented on a timeline.
C)
Timelines are an important first step in organizing and then solving a financial problem.
D)
We refer to a series of cash flows lasting several periods as a stream of cash flows.
36)
Which of the following statements regarding growing annuities is false?
36)
A)
A growing annuity is a stream of N growing cash flows, paid at regular intervals.
B)
PV of a growing annuity =C×1
r - g 1 -
1+ g
(1 +r)
N
C)
A growing annuity is like a growing perpetuity that never comes to an end.
D)
We assume that g<r when using the growing annuity formula.
37)
Which of the following statements is false?
37)
A)
If you want to compare or combine cash flows that occur at different points in time, you first
need to convert the cash flows into the same units or move them to the same point in time.
B)
The equivalent value of two cash flows at two different points in time is sometimes referred to
as the time value of money.
C)
Finding the present value and compounding are the same.
D)
A dollar today and a dollar in one year are not equivalent.
38)
Which of the following is not a valid time value of money function in Excel?
38)
A)
FV
B)
NPER
C)
PMT
D)
I
Use the information for the question(s) below.
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.
39)
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 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:
39)
A)
$50,000
B)
$101,291
C)
$107,532
D)
$97,110
40)
Consider the following timeline:
If the current market rate of interest is 12%, then the value of the cash flows in year 0 and year 2 as
of year 1 is closest to:
40)
A)
$2000
B)
$2013
C)
$1893
D)
$2120
Use the information for the question(s) below.
Assume that you are 30 years old today, and that you are planning on retirement at age 65. Your current salary is $45,000
and you expect your salary to increase at a rate of 5% per year as long as you work. To save for your retirement, you plan on
making annual contributions to a retirement account. Your first contribution will be made on your 31st birthday and will be
8% of this year's salary. Likewise, you expect to deposit 8% of your salary each year until you reach age 65. Assume that the
rate of interest is 7%.
41)
The future value at retirement (age 65) of your savings is closest to:
41)
A)
$1,263,236
B)
$497,530
C)
$928,895
D)
$108,000
