Fin305W Quiz 1 Review

What will be the first payment (in three years) on a scholarship if a donor can donate $350,000 right now? The annual discount factor is 5% and the scholarship payments will grow at a 2% rate to compensate for future tuition and cost of living increases. The scholarship will make its first payment in three years and will continue to make payments forever.

$11,576.25

A first-round draft choice quarterback has been just signed to a two-year $12 million contract. The details provide for an immediate cash bonus of $5 million. The player is to receive $3 million in salary one year from now, and $4 million two years from now. Assuming a 7 percent discount rate, how much is the contract worth right now?

$11.3 million

How much money do you have to invest every year for the next 25 years to guarantee yourself a 20-year annuity of $90,000 starting in 26 years? You make the first investment payment next year and the last investment payment 25 years from now. You receive the first annuity payment of $90,000 in 26 years and you receive the last annuity payment of $90,000 in 45 years. Assume an interest rate of 7%.

$15,074.72

Your grandma put $10,000 in a bank account 23 years ago. Suddenly she remembers about the money and gives them to you as a gift. How much money do you get right now if the bank was paying a constant annual interest rate of 2% on that account?

$15,768.99

You will deposit $1,000 into a checking account each year over the next 10 years. The first deposit is made next year and the last deposit is in 10 years from now. How much money do you have in this account 11 years from now (one year after you have made your last deposit)? Assume an interest rate of 10%.

$17,530.7

A customer is promising a total payment of $7 million over the next three years. The annual interest rate is 2%. Which of these payment schedules over the next three years do you prefer:

$3 million in year 1, $3 million in year 2, and $1 million in year 3

How much money would you have nine years from now if you invest $200 two years from now at an effective annual interest rate of 7%?

$300.15

A client is promising you a total payment of $4 million over the next three years. You use a discount rate of 6%. Which of these payment schedules over the next three years do you prefer:

$4mm year 1, $0 year 2, $0 year 3

Suppose you need $6,000 in five years for the down payment on a new car. If you can earn 3% annually, how much do you need to invest today?

$5,175.65

You have $5,800 and you want to buy a used car that costs $7,000. At what monthly interest rate do you need to invest to be able to buy the car in a year and a half from now (18 months)?

1.05%

You've been offered an investment that will pay you 7 percent per year. If you invest $15,000 today, how many years until you have $31,573?

11

Suppose you have just celebrated your 15th birthday. A rich uncle has set up a trust fund for you that will pay you $250,000 when you turn 29. If the relevant discount rate is 5 percent, how much is this fund worth today?

126,266.99

What is the present value of receiving a $1 annual dividend forever, starting in six years? Assume an annual interest rate of 5%.

15.67

What will be the first payment on a scholarship if a donor can donate $500,000 right now? The annual discount factor is 5% and the scholarship payments will grow at a 2% rate to compensate for future tuition and cost of living increases. The scholarship will make its first payment in 4 years and will continue to make payments forever.

17,364.38

You plan to make a series of deposits and withdrawals in a bank account. You will deposit $1,000 today, and $2,000 in five years. You will withdraw $700 three years from now. How much will you have after eight years if the interest rate is 5 percent?

2,899.31

You have just made a $8,429 contribution to your retirement account. Assuming you earn an 8 percent rate of return and make no additional contributions, what will your account be worth when you retire in 43 years?

230,673.41

The Maybe Pay Life Insurance Co. is trying to sell you an investment policy that will pay you and your heirs $20,000 per year forever. If the required return on this investment is 5 percent, how much will you pay for the policy right now? The first payment will be 5 years from now.

329,080.99

Suppose you borrow $398,564 for a house. You have good credit and the bank offers you a 30-year loan with a monthly interest rate of 0.3% (and APR of 3.6%). The first monthly payment is due at the end of the first month. In exactly 5 years you win the lottery. You decide to sell your house and pay off the remaining value of the loan. How much do you owe the bank assuming the bank asks for the present value of the remaining payments and does not ask for any additional fees?

358,111.26

An investment offers $6,000 per year for 15 years, with the first payment occurring one year from now. If the required return is 7 percent, what is the present value of the investment?

54,647

What's the present value of an annuity that will pay eleven payments of $10,000 each year? The first payment is today, and the next ten payments will be paid over the next ten years. The discount rate is 9%.

74,177

The costs associated with the conflicts of interest between the shareholders and the management of a corporation are called

Agency costs

What is the primary disadvantage of the corporate form of organization?

Double taxation to shareholders

The tools we use in Finance are most related to which discipline?

Economics

What happens to the future value of an annuity if you increase the interest rate r? Assume that everything else remains the same (number of periods and payments). The future value is calculated as of the last annuity payment.

Future value increases

As you increase the length of time involved (and the number of payments) while keeping the payment size, the present value of an annuity

Goes up

You are offered a financial product that will pay you 20 payments starting in a year. The first payment will be $15,000. After that, the payments will grow at a 2.5% annual rate to account for the expected inflation rate. Assume a 4% discount rate. If you want to compute the appropriate price for this financial product, you will use the:

Growing annuity formula

You want to endow a scholarship for ten years. The first scholarship payment will be $30,000 next year and the last payment will be $42,318 eleven years from now. The scholarship will, therefore, grow at a 3.5% annual rate over the ten years when it pays out. Assume a discount rate of 7.5%. To calculate the present value of this scholarship, you will use the:

Growing annuity formula

Investment X offers to pay you $5,200 per year for eight years, whereas investment Y offers to pay you $7,300 per year for five years. Which of these cash flow streams has the higher present value if the discount rate is 10 percent?

Investment X

Which of these countries has been historically most friendly to the interest of various stakeholders? (Let's say as of 1980.)

Japan

A first-round draft choice quarterback has been signed to a three-year, $25 million contract. The details provide an immediate cash bonus of $2 million. The player is to receive $5 million in salary at the end of the first year, $8 million at the end of the second year, and $10 million at the end of the third year. Assuming an 8 percent discount rate, is this package worth $25 million right now?

No, it is worth between $20 and $25 million right now

Which of these forms of business organization has the extra advantage of an active market where small investors can buy shares of the company?

None of these have an active market open to small shareholders

What is the main difference between a public and a private corporation?

Private corporations are not listed on a major stock exchange

Generally, a public corporation is owned by the

Shareholders

We would expect agency problems to be more severe in

a company with a larger number of small individual owners

As you increase the discount factor, the present value of an annuity

goes down

What happens to the present value of a growing annuity if you decrease the growth rate of the payments g (say from 4% to 3%)? Assume that the first payment, the number of periods, and the discount rate are positive numbers that do not change with the decrease in the growth rate.

present value decreases