Chapter 6 B feedback time For Lease Expire Years last Years Net

Fundamentals of Corporate Finance 3e Test Bank

92.

Jeff Lovett has a five-year loan on which he will make annual payments of $2,235, beginning

now. If the interest rate on the loan is 8.3 percent, what is the present value of this annuity?

(Round to the nearest dollar.)

A)

$9,588

B)

$8,854

C)

$8,612

D)

$9,122

Ans:

A

Fundamentals of Corporate Finance 3e Test Bank

93.

: Ann Chang is investing $2,500 today and will do so at the beginning of each of the next six

years for a total of seven payments. If her investment can earn 12 percent, how much will she

have at the end of seven years? (Round to the nearest dollar.)

A)

$25,223

B)

$28,249

C)

$31,127

D)

$29,460

Ans:

B

Fundamentals of Corporate Finance 3e Test Bank

94.

Your inheritance will pay you $100,000 a year for five years beginning now. You can invest it

in a CD that will pay 7.75 percent annually. What is the present value of your inheritance?

(Round to the nearest dollar.)

A)

$399,356

B)

$401,916

C)

$433,064

D)

$467,812

Ans:

C

Fundamentals of Corporate Finance 3e Test Bank

95.

Noel Klinger is planning to invest in an insurance company product. The product will pay

$12,500 at the end of this year. Thereafter, the payments will grow annually at a 2.5 percent

rate forever. Jack will be able to invest his cash flows at a rate of 5.5 percent. What is the

present value of this investment cash flow stream? (Round to the nearest dollar.)

A)

$326,908

B)

$312,766

C)

$416,667

D)

$446,667

Ans:

C

Fundamentals of Corporate Finance 3e Test Bank

96.

Bryant Investments is putting out a new product. The product will pay out $32,000 in the first

year, and after that the payouts will grow by an annual rate of 2.75 percent forever. If you can

invest the cash flows at 7.25 percent, how much will you be willing to pay for this perpetuity?

(Round to the nearest dollar.)

A)

$721,111

B)

$633,111

C)

$531,111

D)

$711,111

Ans:

D

Fundamentals of Corporate Finance 3e Test Bank

97.

Shelton Enterprises is expecting tremendous growth from its newest boutique store. Next year

the store is expected to bring in net cash flows of $675,000. The company expects its earnings

to grow annually at a rate of 13 percent for the next 15 years. What is the present value of this

growing annuity if the firm uses a discount rate of 18 percent on its investments? (Round to the

nearest dollar.)

A)

$6,448,519

B)

$6,750,000

C)

$7,115,449

D)

$5,478,320

Ans:

A

Fundamentals of Corporate Finance 3e Test Bank

AICPA: Measurement

98.

Foodelicious Corp. is evaluating whether it should take over the lease of an ethnic restaurant in

Manhattan. The current owner had originally signed a 25-year lease, of which 16 years still

remain. The restaurant has been growing steadily at a 7 percent growth for the last several

years. Foodelicious Corp. expects the restaurant to continue to grow at the same rate for the

remaining lease term. Last year, the restaurant brought in net cash flows of $310,000. If the

firm evaluates similar investments at 15 percent, what is the present value of this investment?

(Round to the nearest dollar.)

A)

$2,966,350

B)

$2,838,182

C)

$3,109,460

D)

$2,709,124

Ans:

B

Fundamentals of Corporate Finance 3e Test Bank

AICPA: Measurement

99.

Beautinator Cosmetics borrowed $152,300 from a bank for three years. If the quoted rate

(APR) is 11.75 percent, and the compounding is daily, what is the effective annual rate (EAR)?

(Round to one decimal place.)

A)

11.7%

B)

14.3%

C)

12.5%

D)

11.6%

Ans:

C

Fundamentals of Corporate Finance 3e Test Bank

100.

Surreal Corp. has borrowed to invest in a project. The loan calls for a payment of $17,500 every

month for three years. The lender quoted Surreal a rate of 8.40 percent with monthly

compounding. At what rate would you discount the payments to find amount borrowed by

Surreal Corp.? (Round to two decimal places.)

A)

8.40%

B)

8.73%

C)

8.95%

D)

8.44%

Ans:

B

101.

How is an annuity due different from the ordinary annuity?

Fundamentals of Corporate Finance 3e Test Bank

102.

The annual percentage rate (APR) is not the appropriate rate to perform present or future value

calculations. Explain this statement.

AICPA: Legal/Regulatory Perspective

103.

What was the purpose behind the passage of the two consumer protection acts discussed in this

chapter?

APR be disclosed on all consumer loans and savings plans and that it be prominently

Fundamentals of Corporate Finance 3e Test Bank

104.

What are the three ways of interest rate quoted in the market place?