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Chapter 28: Time Value of Money
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Page 81
POINTS:
1
132. Which of the following statements is CORRECT?
a.
If some cash flows occur at the beginning of the periods while others occur at the ends, then we have what the
textbook defines as a variable annuity.
b.
The cash flows for an ordinary (or deferred) annuity all occur at the beginning of the periods.
c.
If a series of unequal cash flows occurs at regular intervals, such as once a year, then the series is by definition
an annuity.
d.
The cash flows for an annuity due must all occur at the ends of the periods.
e.
The cash flows for an annuity must all be equal, and they must occur at regular intervals, such as once a year
or once a month.
ANSWER:
e
133. Which of the following statements is CORRECT?
a.
If some cash flows occur at the beginning of the periods while others occur at the ends, then we have what the
textbook defines as a variable annuity.
b.
The cash flows for an ordinary (or deferred) annuity all occur at the beginning of the periods.
Chapter 28: Time Value of Money
c.
If a series of unequal cash flows occurs at regular intervals, such as once a year, then the series is by definition
an annuity.
d.
The cash flows for an annuity due must all occur at the beginning of the periods.
e.
The cash flows for an annuity may vary from period to period, but they must occur at regular intervals, such as
once a year or once a month.
ANSWER:
d
134. Which of the following statements is CORRECT?
a.
If CF0 is positive and all the other CFs are negative, then you cannot solve for I.
b.
If you have a series of cash flows, each of which is positive, you can solve for I, where the solution value of I
causes the PV of the cash flows to equal the cash flow at Time 0.
c.
If you have a series of cash flows, and CF0 is negative but each of the following CFs is positive, you can solve
for I, but only if the sum of the undiscounted cash flows exceeds the cost.
d.
To solve for I, one must identify the value of I that causes the PV of the positive CFs to equal the absolute
value of the PV of the negative CFs. This is, essentially, a trial-and-error procedure that is easy with a
computer or financial calculator but quite difficult otherwise.
e.
If you solve for I and get a negative number, then you must have made a mistake.
ANSWER:
d
135. Which of the following statements is CORRECT?
a.
If CF0 is positive and all the other CFs are negative, then you can still solve for I.
b.
If you have a series of cash flows, each of which is positive, you can solve for I, where the solution value of I
causes the PV of the cash flows to equal the cash flow at Time 0.
c.
If you have a series of cash flows, and CF0 is negative but each of the following CFs is positive, you can solve
for I, but only if the sum of the undiscounted cash flows exceeds the cost.
d.
To solve for I, one must identify the value of I that causes the PV of the positive CFs to equal the absolute
value of the FV of the negative CFs. It is impossible to find the value of I without a computer or financial
calculator.
e.
If you solve for I and get a negative number, then you must have made a mistake.
ANSWER:
a
136. Your sister paid $10,000 (CF at t = 0) for an investment that promises to pay $750 at the end of each of the next 5
years, then an additional lump sum payment of $10,000 at the end of the 5th year. What is the expected rate of return on
this investment?
a.
6.77%
b.
7.13%
c.
7.50%
d.
7.88%
e.
8.27%
ANSWER:
c
137. You are offered a chance to buy an asset for $7,250 that is expected to produce cash flows of $750 at the end of Year
1, $1,000 at the end of Year 2, $850 at the end of Year 3, and $6,250 at the end of Year 4. What rate of return would you
earn if you bought this asset?
a.
4.93%
b.
5.19%
c.
5.46%
d.
5.75%
e.
6.05%
ANSWER:
e
138. You have just purchased a U.S. Treasury bond for $747.25. No payments will be made until the bond matures 5
years from now, at which time it will be redeemed for $1,000. What interest rate will you earn on this bond?
a.
4.37%
b.
4.86%
c.
5.40%
d.
6.00%
e.
6.60%
ANSWER:
d
139. You have purchased a U.S. Treasury bond for $3,000. No payments will be made until the bond matures 10 years
from now, at which time it will be redeemed for $5,000. What interest rate will you earn on this bond?
a.
3.82%
b.
4.25%
c.
4.72%
d.
5.24%
e.
5.77%
ANSWER:
d
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Page 86
140. Ten years ago, Kronan Corporation earned $0.50 per share. Its earnings this year were $2.20. What was the growth
rate in earnings per share (EPS) over the 10-year period?
a.
15.17%
b.
15.97%
c.
16.77%
d.
17.61%
e.
18.49%
ANSWER:
b
141. Wildwoods, Inc. earned $1.50 per share five years ago. Its earnings this year were $3.20. What was the growth rate
in earnings per share (EPS) over the 5-year period?
Chapter 28: Time Value of Money
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Page 87
a.
15.54%
b.
16.36%
c.
17.18%
d.
18.04%
e.
18.94%
ANSWER:
b
142. You have $5,000 invested in a bank that pays 3.8% annually. How long will it take for your funds to triple?
a.
23.99
b.
25.26
c.
26.58
d.
27.98
e.
29.46
143. Your bank pays 4% interest annually. You have $2,500 invested in the bank. How long will it take for your funds to
double?
a.
14.39
b.
15.15
c.
15.95
d.
16.79
e.
17.67
POINTS:
1
144. Brockman Corporation's earnings per share were $3.50 last year, and its growth rate during the prior 5 years was
9.0% per year. If that growth rate were maintained, how many years would it take for Brockman's EPS to triple?
a.
9.29
b.
10.33
c.
11.47
d.
12.75
e.
14.02
ANSWER:
d
Chapter 28: Time Value of Money
POINTS:
1
145. Your investment account pays 8.0%, compounded annually. If you invest $5,000 today, how many years will it take
for your investment to grow to $9,140.20?
a.
5.14
b.
5.71
c.
6.35
d.
7.05
e.
7.84
POINTS:
1
146. Your investment advisor has recommended your invest in bonds that pay 6.0%, compounded annually. If you invest
$10,000 today, how many years will it take for your investment to grow to $30,000?
a.
12.37
b.
13.74
c.
15.27
d.
16.97
e.
18.85
POINTS:
1
147. You are hoping to buy a new boat 3 years from now, and you plan to save $4,200 per year, beginning one year from
today. You will deposit your savings in an account that pays 5.2% interest. How much will you have just after you make
the 3rd deposit, 3 years from now?
a.
$11,973
b.
$12,603
c.
$13,267
d.
$13,930
e.
$14,626
ANSWER:
c
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Page 91
148. You want to buy new kitchen appliances 2 years from now, and you plan to save $8,200 per year, beginning one year
from today. You will deposit your savings in an account that pays 6.2% interest. How much will you have just after you
make the 2nd deposit, 2 years from now?
a.
$15,260
b.
$16,063
c.
$16,908
d.
$17,754
e.
$18,642
ANSWER:
c
149. You would like to travel in South America 5 years from now, and you can save $3,100 per year, beginning one year
from today. You plan to deposit the funds in a mutual fund that you think will return 8.5% per year. Under these
conditions, how much would you have just after you make the 5th deposit, 5 years from now?
a.
$18,369
b.
$19,287
c.
$20,251
d.
$21,264
Chapter 28: Time Value of Money
e.
$22,327
ANSWER:
a
150. You want to purchase a motorcycle 4 years from now, and you plan to save $3,500 per year, beginning immediately.
You will make 4 deposits in an account that pays 5.7% interest. Under these assumptions, how much will you have 4
years from today?
a.
$16,112
b.
$16,918
c.
$17,763
d.
$18,652
e.
$19,584
ANSWER:
a
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151. You want to open a sushi bar 3 years from now, and you plan to save $7,000 per year, beginning immediately. You
will make 3 deposits in an account that pays 5.2% interest. Under these assumptions, how much will you have 3 years
from today?
a.
$20,993
b.
$22,098
c.
$23,261
d.
$24,424
e.
$25,645
ANSWER:
c
152. You plan to work for Strickland Corporation for 12 years after graduation and after that want to start your own
business. You expect to save and deposit $7,500 a year for the first 6 years (t = 1 through t = 6) and $15,000 annually for
the following 6 years (t = 7 through t = 12). The first deposit will be made a year from today. In addition, your
grandmother just gave you a $25,000 graduation gift that you will deposit immediately (t = 0). If the account earns 9%
