Chapter 5 How much will he have at the end of six years

Fundamentals of Corporate Finance 3e Test Bank

51.

Kevin Robertson would like to buy a condo in Florida in six years. He is looking to invest

$75,000 today in a stock that is expected to earn a return of 18.3 percent annually. How much

will he have at the end of six years? (Round to the nearest dollar.)

A)

$205,575

B)

$157,350

C)

$184,681

D)

$273,620

Ans:

A

Fundamentals of Corporate Finance 3e Test Bank

52.

Lori Willis plans to invest for retirement, which she hopes will be in 20 years. She is planning

to invest $25,000 today in U.S. Treasury bonds that will earn interest at 6.25 percent annually.

How much will she have at the end of 20 years? (Round to the nearest dollar.)

A)

$68,870

B)

$50,625

C)

$84,046

D)

$75,000

Ans:

C

Fundamentals of Corporate Finance 3e Test Bank

53.

Your brother has asked you to help him to choose an investment. He has $6,000 to invest today

for a period of two years. You identify a bank CD that pays an interest rate of 4.25 percent with

the interest being paid quarterly. What will be the value of the investment in two years?

A)

$6,550

B)

$6,529

C)

$6,107

D)

$6,216

Ans:

B

Fundamentals of Corporate Finance 3e Test Bank

54.

Dynoxo Textiles has a cash inflow of $1 million, which it needs for a long-term investment, at

the end of one year. It plans to deposit the money in a bank CD that pays daily interest at 4.50

percent. What will be the value of the investment at the end of the year? (Round to the nearest

dollar.)

A)

$1,020,475

B)

$1,000,103

C)

$1,037,500

D)

$1,046,025

Ans:

D

Fundamentals of Corporate Finance 3e Test Bank

55.

Your mother is trying to choose one of the following bank CDs to deposit $10,000. Which will

have the highest future value if she plans to invest for three years?

A)

3.50% compounded daily

B)

3.25% compounded monthly

C)

3.40% compounded quarterly

D)

3.75% compounded annually

Ans:

D

Fundamentals of Corporate Finance 3e Test Bank

56.

Lorene Buckley wants to invest $3,500 today in a money market fund that pays a quarterly

interest at 5 percent. She plans to fund a scholarship with the proceeds at her alma mater,

Towson University. How much will Lorene have at the end of seven years? (Round to the

nearest dollar.)

A)

$5,091

B)

$3,849

C)

$4,956

D)

$5,075

Ans:

C

Fundamentals of Corporate Finance 3e Test Bank

57.

Paul Springer plans to save for a down payment for a house in 10 years. He will be able to

invest $12,000 today in a money market account that will pay him an interest of 5.50 percent on

a monthly basis. How much will he have at the end of 10 years?

A)

$12,640

B)

$20,773

C)

$24,859

D)

$23,080

Ans:

B

Fundamentals of Corporate Finance 3e Test Bank

58.

Jack Palomo has deposited $2,500 today in an account paying 6 percent interest annually. What

would be the simple interest earned on this investment in five years? If the account paid

compound interest, what would be the interest on interest in five years?

A)

$750; $95.56

B)

$150; $845.56

C)

$150; $95.56

D)

$95.56; $845.56

Fundamentals of Corporate Finance 3e Test Bank

59.

Camille Noah is investing $5,000 in an account paying 6.75 percent annually for three years.

What is the interest on interest if interest is compounded?

A)

$1,012.50

B)

$1,082.38

C)

$82.38

D)

$69.88

Ans:

D

Fundamentals of Corporate Finance 3e Test Bank

60.

Richard McLean wants to invest $3,000 in an account paying 5.25 percent compounded

quarterly. What is the interest on interest after four years?

A)

$695.98

B)

$65.98

C)

$630.00

D)

$157.50

Ans:

B

Fundamentals of Corporate Finance 3e Test Bank

61.

Dat Nguyen is depositing $17,500 in an account paying an annual interest rate of 8.25 percent

compounded monthly. What is the interest on interest after six years?

A)

$8,662.50

B)

$10,925.44

C)

$2,497.63

D)

$1,092.48

Ans:

C

Fundamentals of Corporate Finance 3e Test Bank

AICPA: Measurement

62.

Shawn Bowker invested $10,000 in a money market account that will pay 5.75 percent

compounded daily. How much will the interest on interest be after two years?

A)

$1,218.63

B)

$1,150.00

C)

$33.06

D)

$68.63

Ans:

D

AICPA: Measurement

63.

Which of the following equations is used to calculate the future value of an investment?

A)

FVn = PV ÷ (1 + i)n

B)

FVn = PV × (1 + i)n

C)

FVn = (1 + i)n + PV

D)

FVn = (1 + i)n ÷ PV

Fundamentals of Corporate Finance 3e Test Bank

64.

Which of the following equations is used to calculate the future value of an investment when

interest is compounded m times a year?

A)

FVn = PV ÷ (1 + i)m×n

B)

FVn = PV × (1 + i/m)m×n

C)

FVn = (1 + i)m×n+ PV

D)

FVn = (1 + i)m×n÷ PV

Ans:

B

65.

Joseph Harris is considering an investment that pays 6.5 percent annually. How much must he

invest today such that he will have $25,000 in seven years? (Round to the nearest dollar.)

A)

$17,474

B)

$18,850

C)

$16,625

D)

$16,088

Ans:

D

Fundamentals of Corporate Finance 3e Test Bank

66.

Which of the following statements is true?

A)

Present value calculations involve converting the initial amount into a future amount.

B)

The present value (PV) is often called the compounded value of future cash payments.

C)

The present value is calculated by using the discount factor.

D)

The future value of an investment is the reciprocal of its present value.

Ans:

C

67.

When discount rate:

A)

decreases, the present value of the future cash flow does not change.

B)

decreases, the present value of any future cash flow increases.

C)

increases, the present value of any future cash flow increases.

D)

increases, the present value of any future cash flow does not change.

Ans:

B

68.

When discount rate:

A)

increases, the present value of a future cash flow decreases.

B)

increases, the present value of a future cash flow increases.

C)

decreases, the present value of a future cash flow will remain the same.

D)

decreases, the present value of a future cash flow decreases.

Ans:

A

Fundamentals of Corporate Finance 3e Test Bank

69.

Which of the following statements is true with respect to the present value of a future amount?

A)

The higher the discount rate, the higher the present value of a single sum for a given time

period.

B)

The relation between present value and time is exponential.

C)

The greater the time period, the higher the present value of a single sum for a given

interest rate.

D)

The lower the discount rate, the lower the present value of a single sum for a given time

period.

Ans:

B

70.

Juan and Rachel Burpo plan to buy a time-share in six years of $16,860. In order to have

adequate funds to do so, the Burpo want to make a deposit to their money market fund today.

Assume that they will be able to earn an investment rate of 5.75%, compounded annually. How

much will Juan and Rachel need to deposit today to achieve their goal? (Round off to the

nearest dollar.)

A)

$11,138

B)

$8,885

C)

$12,055

D)

$14,243

Ans:

C

Fundamentals of Corporate Finance 3e Test Bank

71.

Steve Fisher is saving for a new car. He needs to have $ 21,000 for the car in three years. How

much will he have to invest today in an account paying 8 percent annually to achieve his target?

(Round to nearest dollar.)

A)

$22,680

B)

$26,454

C)

$16,670

D)

$19,444

Ans:

C

Fundamentals of Corporate Finance 3e Test Bank

72.

Jacob’s friend, Albert, borrows today with a promise to repay $7,418.87 in four years. If Jacob

could earn 5.45 percent annually on the any investment he makes today, how much would he be

willing to lend Albert today? (Round to nearest dollar.)

A)

$6,000

B)

$7,035

C)

$6,500

D)

$7,150

Ans:

A

Fundamentals of Corporate Finance 3e Test Bank

73.

Joyce Thomas wants to buy a house in six years. She hopes to have $25,000 at that time. If the

bank CD she wants to invest in will pay 7.5 percent annually, how much will she have to invest

today? (Round to the nearest dollar.)

A)

$18,472

B)

$13,987

C)

$16,199

D)

$23,256

Ans:

C

Fundamentals of Corporate Finance 3e Test Bank

74.

Robert Kelly wants to start a business in 10 years. He hopes to have $100,000 at that time to

invest in the business. To reach his goal, he plans to invest a certain amount today in a bank CD

that will pay him 9.50 percent annually. How much will he have to invest today to achieve his

target? (Round to the nearest dollar.)

A)

$54,233

B)

$63,837

C)

$91,324

D)

$40,351

Ans:

D

Fundamentals of Corporate Finance 3e Test Bank

75.

Leroy Diaz plans to invest some money today so that he will receive $7,500 in three years. If

the investment he is considering will pay 3.65 percent compounded daily, how much will he

have to invest today?

A)

$5,276

B)

$6,722

C)

$6,897

D)

$7,140

Ans:

B