Question 1

A wealthy benefactor just donated some money to the local college. This gift was established to provide scholarships for worthy students. The first scholarships will be granted one year from now for a total of $35,000. Annually thereafter, the scholarship amount will be increased by 5.5 percent to help offset the effects of inflation. The scholarship fund will last indefinitely. What is the value of this gift today at a discount rate of 8 percent?

Accepted Answer

A)  $437,500
B)  $750,000
C)  $1,200,000
D)  $1,400,000
E)  $1,450,750F) B) and D)
G) A) and E)

Question 2

You have some property for sale and have received two offers. The first offer is for $89,500 today in cash. The second offer is the payment of $35,000 today and an additional $70,000 two years from today. If the applicable discount rate is 11.5 percent, which offer should you accept and why?

Accepted Answer

A)  You should accept the $89,500 today because it has the higher net present value.
B)  You should accept the $89,500 today because it has the lower future value.
C)  You should accept the first offer as it has the greatest value to you.
D)  You should accept the second offer because it has the larger net present value.
E)  It does not matter which offer you accept as they are equally valuablE. F) D) and E)
G) All of the above

Question 3

A preferred stock pays an annual dividend of $2.60. What is one share of this stock worth today if the rate of return is 11.75 percent?

Accepted Answer

A)  $18.48
B)  $20.00
C)  $22.13
D)  $28.80
E)  $30.55F) A) and E)
G) A) and B)

Question 4

Which one of the following statements related to annuities and perpetuities is correct?

Accepted Answer

A)  An ordinary annuity is worth more than an annuity due given equal annual cash flows for ten years at 7 percent interest, compounded annually.
B)  A perpetuity comprised of $100 monthly payments is worth more than an annuity comprised of $100 monthly payments, given an interest rate of 12 percent, compounded monthly.
C)  Most loans are a form of a perpetuity.
D)  The present value of a perpetuity cannot be computed, but the future value can.
E)  Perpetuities are finite but annuities are not.F) B) and E)
G) A) and C)

Question 5

You borrow $165,000 to buy a house. The mortgage rate is 7.5 percent and the loan period is 30 years. Payments are made monthly. If you pay the mortgage according to the loan agreement, how much total interest will you pay?

Accepted Answer

A)  $206,408
B)  $229,079
C)  $250,332
D)  $264,319
E)  $291,406F) A) and E)
G) A) and D)

Question 6

The Wine Press is considering a project which has an initial cash requirement of $187,400. The project will yield cash flows of $2,832 monthly for 84 months. What is the rate of return on this project?

Accepted Answer

A)  6.97 percent
B)  7.04 percent
C)  7.28 percent
D)  7.41 percent
E)  7.56 percentF) B) and E)
G) C) and E)

Question 7

Meadow Brook Manor would like to buy some additional land and build a new assisted living center. The anticipated total cost is $23.6 million. The CEO of the firm is quite conservative and will only do this when the company has sufficient funds to pay cash for the entire construction project. Management has decided to save $1.2 million a quarter for this purpose. The firm earns 6.25 percent, compounded quarterly, on the funds it saves. How long does the company have to wait before expanding its operations?

Accepted Answer

A)  4.09 years
B)  4.32 years
C)  4.46 years
D)  4.82 years
E)  4.91 yearsF) A) and C)
G) B) and D)

Question 8

Which one of the following statements correctly states a relationship?

Accepted Answer

A)  Time and future values are inversely related, all else held constant.
B)  Interest rates and time are positively related, all else held constant.
C)  An increase in the discount rate increases the present value, given positive rates.
D)  An increase in time increases the future value given a zero rate of interest.
E)  Time and present value are inversely related, all else held constant.F) All of the above
G) C) and D)

Question 9

This morning, you borrowed $150,000 to buy a house. The mortgage rate is 7.35 percent. The loan is to be repaid in equal monthly payments over 20 years. The first payment is due one month from today. How much of the second payment applies to the principal balance? (Assume that each month is equal to 1/12 of a year.)

Accepted Answer

A)  $268.84
B)  $277.61
C)  $917.06
D)  $925.83
E)  $1,194.67F) B) and D)
G) A) and D)

Question 10

The entire repayment of which one of the following loans is computed simply by computing a single future value?

Accepted Answer

A)  interest-only loan
B)  balloon loan
C)  amortized loan
D)  pure discount loan
E)  bullet loanF) A) and D)
G) A) and E)

Question 11

Trish receives $480 on the first of each month. Josh receives $480 on the last day of each month. Both Trish and Josh will receive payments for next three years. At a 9.5 percent discount rate, what is the difference in the present value of these two sets of payments?

Accepted Answer

A)  $118.63
B)  $121.06
C)  $124.30
D)  $129.08
E)  $132.50F) A) and B)
G) B) and D)

Question 12

Western Bank offers you a $21,000, 6-year term loan at 8 percent annual interest. What is the amount of your annual loan payment?

Accepted Answer

A)  $4,228.50
B)  $4,542.62
C)  $4,666.67
D)  $4,901.18
E)  $5,311.07F) B) and D)
G) A) and B)

Exam 6: Discounted Cash Flow Valuation

Which one of the following statements related to annuities and perpetuities is correct?

Correct Answer
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Correct Answer
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Correct Answer
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You have some property for sale and have received two offers. The first offer is for $89,500 today in cash. The second offer is the payment of $35,000 today and an additional $70,000 two years from today. If the applicable discount rate is 11.5 percent, which offer should you accept and why?

Correct Answer
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The Wine Press is considering a project which has an initial cash requirement of $187,400. The project will yield cash flows of $2,832 monthly for 84 months. What is the rate of return on this project?

Correct Answer
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Trish receives $480 on the first of each month. Josh receives $480 on the last day of each month. Both Trish and Josh will receive payments for next three years. At a 9.5 percent discount rate, what is the difference in the present value of these two sets of payments?

Correct Answer
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The entire repayment of which one of the following loans is computed simply by computing a single future value?

Correct Answer
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A preferred stock pays an annual dividend of $2.60. What is one share of this stock worth today if the rate of return is 11.75 percent?

Correct Answer
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Correct Answer
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Which one of the following statements correctly states a relationship?

Correct Answer
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You borrow $165,000 to buy a house. The mortgage rate is 7.5 percent and the loan period is 30 years. Payments are made monthly. If you pay the mortgage according to the loan agreement, how much total interest will you pay?

Correct Answer
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Western Bank offers you a $21,000, 6-year term loan at 8 percent annual interest. What is the amount of your annual loan payment?

Correct Answer
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Exam 6: Discounted Cash Flow Valuation

Which one of the following statements related to annuities and perpetuities is correct?

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

You have some property for sale and have received two offers. The first offer is for $89,500 today in cash. The second offer is the payment of $35,000 today and an additional $70,000 two years from today. If the applicable discount rate is 11.5 percent, which offer should you accept and why?

Correct AnswerverifiedShow Answer

The Wine Press is considering a project which has an initial cash requirement of $187,400. The project will yield cash flows of $2,832 monthly for 84 months. What is the rate of return on this project?

Correct AnswerverifiedShow Answer

Trish receives $480 on the first of each month. Josh receives $480 on the last day of each month. Both Trish and Josh will receive payments for next three years. At a 9.5 percent discount rate, what is the difference in the present value of these two sets of payments?

Correct AnswerverifiedShow Answer

The entire repayment of which one of the following loans is computed simply by computing a single future value?

Correct AnswerverifiedShow Answer

A preferred stock pays an annual dividend of $2.60. What is one share of this stock worth today if the rate of return is 11.75 percent?

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Which one of the following statements correctly states a relationship?

Correct AnswerverifiedShow Answer

You borrow $165,000 to buy a house. The mortgage rate is 7.5 percent and the loan period is 30 years. Payments are made monthly. If you pay the mortgage according to the loan agreement, how much total interest will you pay?

Correct AnswerverifiedShow Answer

Western Bank offers you a $21,000, 6-year term loan at 8 percent annual interest. What is the amount of your annual loan payment?

Correct AnswerverifiedShow Answer

Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
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