Fin 355 Exam 1

Corporate bylaws:

Determine how a corporation regulates itself.

You invested $6,500 in an account that pays 6 percent simple interest. How much more could you have earned over a 10-year period if the interest had compounded annually?

$1,240.51

The appropriate discount rate for the following cash flows is 11 percent compounded quarterly. YearCash Flow 1: $600 2: 600 3: 0 4: 1,300 Required: What is the present value of the cash flows?

$1,863.57

Imprudential, Inc., has an unfunded pension liability of $550 million that must be paid in 23 years. To assess the value of the firm's stock, financial analysts want to discount this liability back to the present. If the relevant discount rate is 6.0 percent, what is the present value of this liability?

$143,988,494

Thomas invests $116 in an account that pays 5 percent simple interest. How much money will Thomas have at the end of 5 years?

$145.00

You have just received notification that you have won the $4.5 million first prize in the Centennial Lottery. However, the prize will be awarded on your 100th birthday (assuming you're around to collect), 79 years from now. What is the present value of your windfall if the appropriate discount rate is 10 percent?

$2,416.52

You just purchased an annuity that will pay you $24,000 a year for 25 years, starting today. What was the purchase price if the discount rate is 8.5 percent?

$266,498

When you retire 35 years from now, you want to have $1.2 million. You think you can earn an average of 9 percent on your investments. To meet your goal, you are trying to decide whether to deposit a lump sum today, or to wait and deposit a lump sum 5 years from today. How much more will you have to deposit as a lump sum if you wait for 5 years before making the deposit?

$31,662.08

This morning, you borrowed $162,000 to buy a house. The mortgage rate is 4.35 percent. The loan is to be repaid in equal monthly payments over 20 years with the first payment due one month from today. Assume each month is equal to 1/12 of a year and all taxes and insurance premiums are paid separately. How much of the second payment applies to the principal balance?

$426.11

What is the future value of $3,128 invested for 9 years at 6.5 percent compounded annually?

$5,513.32

On the day you entered college, you borrowed $30,000 from your local bank. The terms of the loan include an interest rate of 4.75 percent. The terms stipulate that the principal is due in full one year after you graduate. Interest is to be paid annually at the end of each year. Assume that you complete college in four years. How much total interest will you pay on this loan assuming you paid as agreed?

$7,125

An investment will pay you $22,000 in 7 years. The appropriate discount rate is 12 percent compounded daily. Required:What is the present value?

$9,498.94

Which one of the following is a working capital management decision?

Determining whether to pay cash for a purchase or use the credit offered by the supplier.

You have been purchasing $9,000 worth of stock annually for the past 5 years and now have a portfolio valued at $45,881. What is your annual rate of return?

.97 percent

You have just made your first $1,500 contribution to your retirement account. Assuming you earn an 8 percent rate of return and make no additional contributions. (a)What will your account be worth when you retire in 30 years? (b)What will your account be worth if you wait 7 years before contributing?

15,093.99 8,807.20

You are looking at a one-year loan of $15,000. The interest rate is quoted as 11 percent plus 4 points. A pointon a loan is simply 1 percent (one percentage point) of the loan amount. Quotes similar to this one are common with home mortgages. The interest rate quotation in this example requires the borrower to pay 4 points to the lender up front and repay the loan later with 11 percent interest. Required :What rate would you actually be paying here?

15.62%

You are considering an annuity that costs $160,000 today. The annuity pays $17,500 a year at an annual interest rate of 7.5 percent. What is the length of the annuity time period?

16 years

You expect to receive $36,000 at graduation in two years. You plan on investing it at 9.25 percent until you have $171,000. How long will you wait from now? (Do not round intermediate calculations. Round your answer to 2 decimal places, e.g., 32.16.)

19.60 years

You're trying to save to buy a new $170,000 Ferrari. You have $34,000 today that can be invested at your bank. The bank pays 4.5 percent annual interest on its accounts. How long will it be before you have enough to buy the car?

36.56 years

In January 2007, the average price of an asset was $28,658. 6 years earlier, the average price was $21,608. What was the annual increase in selling price?

4.82%

You're prepared to make monthly payments of $340, beginning at the end of this month, into an account that pays 6 percent interest compounded monthly. Required: How many payments will you have made when your account balance reaches $19,259? (Do not round your intermediate calculations.)

50

One year ago, you invested $1,800. Today it is worth $1,924.62. What rate of interest did you earn?

6.92 percent

Live Forever Life Insurance Co. is selling a perpetuity contract that pays $1,400 monthly. The contract currently sells for $68,000 Required: (a)What is the monthly return on this investment vehicle? 2.06% (b)What is the APR? (Do not round your intermediate calculations.) 24.71% (c)What is the effective annual rate? (Do not round your intermediate calculations.) 27.70%

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Which one of the following terms is defined as a conflict of interest between the corporate shareholders and the corporate managers?

Agency problem

If you put up $53,000 today in exchange for a 6.75 percent, 14-year annuity, what will the annual cash flow be? (Do not round intermediate calculations and round your final answer to 2 decimal places, e.g., 32.16.)

Annual Cash Flow $5,969.74 ± 0.1%

Why should financial managers strive to maximize the current value per share of the existing stock?

Because they have been hired to represent the interests of the current shareholders.

According to the Rule of 72, you can do which one of the following?

Double your money in 5 years at 14.4 percent interest.

Interest earned on both the initial principal and the interest reinvested from prior periods is called:

Compound interest.

Which one of the following statements is correct?

Corporations can raise large amounts of capital generally easier than partnerships can.

Which one of the following is a capital budgeting decision?

Deciding whether or not to purchase a new machine for the production line.

Which of these will increase the present value of an amount to be received sometime in the future?

Decrease in the interest rate.

This question illustrates what is known as discount interest. Imagine you are discussing a loan with a somewhat unscrupulous lender. You want to borrow $29,000 for one year. The interest rate is 13.4 percent. You and the lender agree that the interest on the loan will be .134 × $29,000 = $3,886. So the lender deducts this interest amount from the loan up front and gives you $25,114. In this case, we say that the discount is $3,886. What is the effective interest rate? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)

Effective Interest Rate: 15.47 ± 1%

Your coin collection contains 43 1952 silver dollars. If your grandparents purchased them for their face value when they were new, how much will your collection be worth when you retire in 2053, assuming they appreciate at an annual rate of 5.8 percent? (Do not round intermediate calculations and round your final answer to 2 decimal places, e.g., 32.16.)

Future Value: $ 12,779.71

A business formed by two or more individuals who each have unlimited liability for all of the firm's business debts is called a:

General partnership

Which of the following should a financial manager consider when analyzing a capital budgeting project? I. Project start-up costs. II. Timing of all projected cash flows. III. Dependability of future cash flows. IV. Dollar amount of each projected cash flow.

I, II, III, and IV.

Which of the following questions are addressed by financial managers? I. How should a product be marketed? II. Should customers be given 30 or 45 days to pay for their credit purchases? III. Should the firm borrow more money? IV. Should the firm acquire new equipment?

II, III, and IV only

The growth of both sole proprietorships and partnerships is frequently limited by their:

Inability to raise cash

In 1895, the first Putting Green Championship was held. The winner's prize money was $200. In 2014, the winner's check was $1,400,000. What was the percentage increase per year in the winner's check over this period? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) If the winner's prize increases at the same rate, what will it be in 2035? (Do not round intermediate calculations. Round your answer to 2 decimal places, e.g., 32.16.)

Increase per year: 7.72% Winner's prize in 2035: $6,678,435.70

Which one of the following actions by a financial manager is most apt to create an agency problem?

Increasing current profits when doing so lowers the value of the firm's equity.

Two banks in the area offer 30-year, $180,000 mortgages at 4.7 percent and charge a $3,700 loan application fee. However, the application fee charged by Insecurity Bank and Trust is refundable if the loan application is denied, whereas that charged by I.M. Greedy and Sons Mortgage Bank is not. The current disclosure law requires that any fees that will be refunded if the applicant is rejected be included in calculating the APR, but this is not required with nonrefundable fees (presumably because refundable fees are part of the loan rather than a fee). What are the EARs on these two loans? What are the APRs? (Do not round intermediate calculations. Enter your answers as a percent rounded to 2 decimal places, e.g., 32.16.)

Insecurity: APR: 4.88 ± 1% EAR: 4.99 ± 1% IM Greedy: APR: 4.70 ± 1% EAR: 4.80 ± 1%

You receive a credit card application from Shady Banks Savings and Loan offering an introductory rate of .5 percent per year, compounded monthly for the first six months, increasing thereafter to 17.6 percent compounded monthly. Assume you transfer the $6,600 balance from your existing credit card and make no subsequent payments. How much interest will you owe at the end of the first year? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

Interest $620.54 ± 1%

Art invested $100 two years ago at 8 percent interest. The first year, he earned $8 interest on his $100 investment. He reinvested the $8. The second year, he earned $8.64 interest on his $108 investment. The extra $.64 he earned in interest the second year is referred to as:

Interest on interest

At 6.9 percent interest, how long does it take to double your money? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) At 6.9 percent interest, how long does it take to quadruple it? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

Length of Time: 10.37 years Length of Time: 20.76 years

The Sarbanes-Oxley Act of 2002 is a governmental response to:

Management greed and abuses.

Decisions made by financial managers should primarily focus on increasing which one of the following?

Market value per share of outstanding stock

Which one of the following best describes the primary advantage of being a limited partner instead of a general partner?

Maximum loss limited to the capital invested.

You want to buy a new sports coupe for $73,500, and the finance office at the dealership has quoted you an APR of 5.5 percent for a 72 month loan to buy the car. What will your monthly payments be? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) What is the effective annual rate on this loan? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)

Monthly Payment $1,200.83 ± 0.1% Effective Annual Rate: 5.64 ± 1%

Bilbo Baggins wants to save money to meet three objectives. First, he would like to be able to retire 30 years from now with retirement income of $34,000 per month for 25 years, with the first payment received 30 years and 1 month from now. Second, he would like to purchase a cabin in Rivendell in 10 years at an estimated cost of $440,000. Third, after he passes on at the end of the 25 years of withdrawals, he would like to leave an inheritance of $1,250,000 to his nephew Frodo. He can afford to save $4,500 per month for the next 10 years. If he can earn an EAR of 10 percent before he retires and an EAR of 7 percent after he retires, how much will he have to save each month in years 11 through 30? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

Monthly Savings $2,847.34 ± 0.1%

A 20-year annuity pays $1,950 per month, and payments are made at the end of each month. If the interest rate is 11 percent compounded monthly for the first ten years, and 7 percent compounded monthly thereafter, what is the present value of the annuity? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

Present Value: $197,746.13 ± 0.1%

The appropriate discount rate for the following cash flows is 9 percent compounded quarterly. Year Cash Flow 1: $750 2: 830 3: 0 4: 1,420 What is the present value of the cash flows? (Do not round intermediate calculations and round your final answer to 2 decimal places, e.g., 32.16.)

Present Value: $2,375.45 ± 0.1%

Find the EAR in each of the following cases (Use 365 days a year. Do not round intermediate calculations. Enter your answers as a percent rounded to 2 decimal places, e.g., 32.16.):

Stated Rate (APR) Number of Times Compounded Effective Rate (EAR) 8.5% Quarterly: 8.77 ± 1% % 17.5 Monthly: 18.97 ± 1% 13.5 Daily: 14.45 ± 1% 10.5 Infinite: 11.07 ± 1%

A coin that was featured in a famous novel sold at auction in 2014 for $6,581,000. The coin had a face value of $10 when it was issued in 1791 and had previously been sold for $235,000 in 1968. At what annual rate did the coin appreciate from its first minting to the 1968 sale? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) What annual rate did the 1968 buyer earn on his purchase? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) At what annual rate did the coin appreciate from its first minting to the 2014 sale? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)

Rate of Return: 5.85% 7.51% 6.19%

Suppose an investment offers to triple your money in 36 months (don't believe it). What rate of return per quarter are you being offered? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)

Rate of Return: 9.59 ± 1%

A business owned by a solitary individual who has unlimited liability for its debt is called a:

Sole proprietorship.

What is the relationship between present value and future value interest factors?

The factors are reciprocals of each other.