finance

What is the present value of the following cash flow stream at a rate of 12.0%? CFs: 0 $0 1 $1,500 2 $3,000 3 $4,500 4 $6,000

$10,747

Today, you are borrowing money and must repay the lender one year from now with a lump-sum payment of $12,800.How much money are you borrowing if the interest rate is 8.45 percent, compounded monthly?

$11,766.32 PV = $12,800 / [1 + (.0845 / 12)]12= $11,766.32

Today, you are borrowing $7,800 to purchase a car. What will be your monthly payment if the loan is for four years at 6.45 percent interest?

$184.80 PV = $7,800 = C ×[(1 - {1 / [1 + (.0645 / 12)]48}) / (.0645 / 12)]C = $184.80

Which one of the following is an ordinary annuity, but not a perpetuity?

$25 paid weekly for 1 year, starting one week from today

You expect to receive $5,000 at graduation one year from now. Your plan is to invest this money at 6.5 percent, compounded annually, until you have $50,000. At that time, you plan to travel around the world. How long from now will it be until you can begin your travels?

$50,000 = $5,000 ×(1 + .065)t t = 36.57 years Wait time = 1 + 36.57 = 37.57 years

Your aunt loaned you money at 1.00 percent interest per month. What is the APR of this loan?

12.00 percent APR = 1.00 ×12 = 12 percent

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?

7.5% cash flow example

The potential conflict of interest between a firm's owners and its managers is referred to as which type of conflict?

Agency

Which of the following bank accounts has the lowest effective annual return?

An account that pays 7% nominal interest with monthly compounding.

Travis is buying a car and will finance it with a loan that requires monthly payments of $265 for the next four years. His car payments can be described by which one of the following terms?

Annuity

Janis just won a scholarship that will pay her $500 a month, starting today, and continuing for the next 48 months. Which one of the following terms best describes these scholarship payments?

Annuity due

A new investment opportunity for you is an annuity that pays $550 at the beginning of each year for 3 years. You could earn 5.5% on your money in other investments with equal risk. What is the most you should pay for the annuity?

BEGIN Mode N 3 I/YR 5.5% PMT $550 FV $0.00 PV $1,565.48

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?

BEGIN Mode N 4 I/YR 5.7% PV $0.00 PMT $3,500 FV =FV $16,112

What is the PV of an annuity due with 5 payments of $2,500 at an interest rate of 5.5%?

BEGIN Mode N 5 I/YR 5.5% PMT $2,500 FV $0.00 PV $11,262.88

Which one of the following situations is most apt to create an agency conflict?

Basing management bonuses on the length of employment

Matt and Alicia created a firm that is a separate legal entity and will share ownership of that firm on a 75/25 basis. Which type of entity did they create if they have no personal liability for the firm's debts?

Corporation

The Corner Bakery needs $86,000 today for remodeling. They have obtained a 2-year, pure-discount loan at an interest rate of 6.8 percent, compounded annually. How much must they repay in two years?

FV = $86,000 ×(1 +.068)2 = $98,093.66

McClary Tires plans to save $20,000, $25,000, $27,500, and $30,000 at the end of each year for Years 1 to 4, respectively. If it earns 3.3 percent on its savings, how much will the firm have saved at the end of Year 4?

FV = ($20,000 ×1.0333^3) + ($25,000 ×1.0332^2) + ($27,500 ×1.0331^1) + $30,000 = $107,130.78

You have $5,000 you want to invest for the next 45 years. You are offered an investment plan that will pay you 6 percent per year for the next 15 years and 10 percent per year for the last 30 years. How much will you have at the end of the 45 years?

Future Value A= $5,000 ×(1 + .06)15 ×(1 + .10)30 = $209,092.54

Your grandparents just gave you a gift of $6,500. You are investing this money for 6 years at 4 percent simple interest. How much money will you have at the end of the 6 years?

Future value = $6,500 + ($6,500 ×.04 ×6) = $8,060

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? Cahoter 3.1

I/YR 9.0% PV $3.50 PMT $0 FV $10.50 N 12.75

Kendall is investing $3,333 today at 3 percent annual interest for three years. Which one of the following will increase the future value of that amount?

Increasing the interest rate

Precision Engineering invested $125,000 at 6 percent interest, compounded annually for 3 years. How much interest on interest did the company earn over this period of time?

Interest on interest = $125,000 ×(1 + .06)3- [$125,000 + ($125,000 ×.06 ×3)] = $1,377

At the end of 10 years, which of the following investments would have the highest future value? Assume that the effective annual rate for all investments is the same and is greater than zero.

Investment A pays $250 at the beginning of every year for the next 10 years (a total of 10 payments).

Of the following investments, which would have the lowest present value? Assume that the effective annual rate for all investments is the same and is greater than zero.

Investment D pays $2,500 at the end of 10 years (just one payment).

What is the PV of an ordinary annuity with 10 payments of $2,700 if the appropriate interest rate is 5.5%?

N 10 I/YR 5.5% PMT $2,700 FV $0.00 PV $20,352

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?

N 3 I/YR 5.2% PV $0.00 PMT $4,200 FV $13,266.56

An uncle of yours who is about to retire wants to sell some of his stock and buy an annuity that will provide him with income of $50,000 per year for 30 years, beginning a year from today. The going rate on such annuities is 7.25%. How much would it cost him to buy such an annuity today?

N 30 I/YR 7.25% PMT $50,000 FV $0.00 PV $605,183

Cyberhost Corporation's sales were $225 million last year. If sales grow at 6% per year, how large (in millions) will they be 5 years later?

N 5 I/YR 6.0% PV $225.00 PMT $0.00 FV $301.10

How much would $20,000 due in 50 years be worth today if the discount rate were 7.5%? End of chapter 2

N 50 I/YR 7.5% PMT $0 FV $20,000 PV $537.78

How much would $100, growing at 5% per year, be worth after 75 years?

N 75 I/YR 5.0% PV $100.00 PMT $0.00 FV $3,883.27

Suppose a State of New Mexico bond will pay $1,000 eight years from now. If the going interest rate on these 8-year bonds is 5.5%, how much is the bond worth today?

N 8 I/YR 5.5% PMT $0 FV $1,000.00 PV $651.60

Ellen now has $125. How much would she have after 8 years if she leaves it invested at 8.5% with annual compounding?

N 8 I/YR 8.5% PV $125 PMT $0 FV $240.08

Suppose your credit card issuer states that it charges a 15.00% nominal annual rate, but you must make monthly payments, which amounts to monthly compounding. What is the effective annual rate?3.2

Nominal I/YR = APR 15.00% Periods/yr 12 EFF% = (1 + (rNOM/N))N − 1 = 16.08%

Katlyn needs to invest $5,318 today in order for her savings account to be worth $8,000 six years from now. Which one of the following terms refers to the $5,318?

Present value

Margie opened a used bookstore and is both the 100 percent owner and the store's manager. Which type of business entity does Margie own if she is personally liable for all the store's debts?

Sole proprietorship

Your bank account pays a 5% nominal rate of interest. The interest is compounded quarterly. Which of the following statements is CORRECT?

The periodic rate of interest is 1.25% and the effective rate of interest is greater than 5%.

Your bank account pays an 8% nominal rate of interest. The interest is compounded quarterly. Which of the following statements is CORRECT?

The periodic rate of interest is 2% and the effective rate of interest is greater than 8%.

You are considering two equally risky annuities, each of which pays $15,000 per year for 20 years. Investment ORD is an ordinary (or deferred) annuity, while Investment DUE is an annuity due. Which of the following statements is CORRECT?

The present value of DUE exceeds the present value of ORD, and the future value of DUE also exceeds the future value of ORD.

One advantage of the corporate form of organization is the:

ability to raise larger sums of equity capital than other organizational forms.

Tomas earned $89 in interest on his savings account last year and has decided to leave the $86 in his account this coming year so it will earn interest. This process of earning interest on prior interest earnings is called:

compounding

The interest rate used to compute the present value of a future cash flow is called the chapter 2

discount rate.

Lucas expects to receive a sales bonus of $7,500 one year from now. The process of determining how much that bonus is worth today is called:

discounting

Marcos is investing $5 today at 7 percent interest so he can have $35 later. This $35 is referred to as the:

future value.

Jamie earned $14 in interest on her savings account last year. She has decided to leave the $14 in her account so that she can earn interest on the $14 this year. The interest earned on last year's interest earnings is called:

interest on interest.

One advantage of forming a corporation

is that equity investors are usually exposed to less liability than in a regular partnership

By definition, a bank that pays simple interest on a savings account will pay interest:

only on the principal amount originally invested.

The Jones Brothers recently established a trust fund that will provide annual scholarships of $12,000 indefinitely. These annual scholarships are:

perpetuity

The primary goal of financial management is to maximize:

the market value of existing stock.